There have been more discussions lately about pursuing homes at the trustee sales.
Here is an interesting chart stolen from http://effectivedemand.blogspot.com/
The percentage of homes being purchased by third-parties, rather than going back to the banks, has risen to the mid-20% range.
Two thoughts:
1. The banks are being more realistic about their opening bids, and are using the trustee sale as a vehicle to efficiently sell product.
2. The investor groups are running at full strength.
In July there were roughly 325 homes purchased at the trustee sales by third-parties.
That’s a lot of flipping!
There’s been more discussion lately about what’s been happening at the trustee sales, and it’s become clear that these investor groups are dominating the action. They are making $50,000 to $100,000 per property on the flips, and are being very aggressive. They are willing to pay a little more to out-bid the individual novice buyer, and, in effect, squashing the hopes and dreams of any small guy getting a “trustee-sale deal”.
For the most part, these investor groups are staying under $500,000, so for those of you who are looking, there should be more opportunities higher up. But checking out the properties, and tracking the foreclosure process is challenging.
I have dedicated and mobilized additional staffing to this effort (in other words, I gave it to wifey), and I think we’ll see some success in having our buyers be successful at the trustee sales – but I think it’ll be limited to those buying a more-expensive home to owner-occupy.
It seems that the window of opportunity has closed for an ordinary person to get a deal at the courthouse steps. You had to be made of some strong stuff to go for a purchase earlier this year at the height of maximum pessimism and have a bag full of cash while everyone else was hemorrhaging money.
Who has over $500K sitting around? If you’ve got that kind of money you have the equity to take down multiple properties, and of course, flip them potentially. It’s an investor, not likely someone just buying a single house.
If you have lots cash lying around and want an expensive house to live in, there’s some potential here for a deal.
What’s happening with the 80% of the houses that go back to the bank? Are the opening bids just above market price on those?
Yay…
1. Banks get bailed out by gov.
2. Banks auction ex-flipper properties at a loss.
3. Banks lend $$$ to flippers to buy auction properties.
4. Banks make the $$$ back in transaction and interest fees.
5. Flippers take on the risk go broke when they can’t sell
6. Go back to step 1
I suspect that the third party trustee sales are going to taper off as the spring-summer sales season comes to a close. The 3rd-party-flippers don’t want to do is carry a property for too long. What the banks do when this happens is an unknown.
It’s currently Shark Week on the Discovery Channel. There’s this documentary about divers who swim in shark-infested waters, without a cage, attempting to touch great whites and actually ride them by holding on to their dorsal fins. Now, these are very experienced shark divers who are carefully picking their spots to attempt these maneuvers. Their reward is a quick thrill and an ego boost, but they risk their lives in the process.
Good luck, flippers.
“I have dedicated and mobilized additional staffing to this effort, (in other words, I gave it to wifey)”
Jim The Realtor 2009
That is a powerful statement Jim!
Colin Powellesque!!!
90 percent of my time is spent on 10 percent of the world.
Colin Powell
94-98 percent of my time is spent on chasing 2-6% commission.
JTR 2009
A dream doesn’t become reality through magic; it takes sweat, determination and hard work.
Colin Powell
A home purchase doesn’t become a reality through magic; it takes sweat, determination and the right price.
JTR 2009
Avoid having your ego so close to your position that when your position falls, your ego goes with it.
Colin Powell
Avoid having your ego so close to your price that when your price falls, your ego goes with it.
JTR 2009
Bad news isn’t wine. It doesn’t improve with age.
Colin Powell
McMansions are not like wine. They do not improve with age.
San Diego County 2009
Don’t be afraid to challenge the pros, even in their own backyard.
Colin Powell and bubbleinfo.com 2009
Don’t bother people for help without first trying to solve the problem yourself.
Colin Powell and REO Speedwagon rubbage removal
Experts often possess more data than judgment.
Colin Powell and 2003-2006 lenders
“I suspect that the third party trustee sales are going to taper off as the spring-summer sales season comes to a close. The 3rd-party-flippers don’t want to do is carry a property for too long. What the banks do when this happens is an unknown.”
I don’t know … I know too many people who are in the market for a flipped home. They don’t know that’s what they’re after, but that’s exactly what they describe when they talk about being willing to spend (borrow) more to have a home they can “enjoy” right away. Under $500,000, people are buying, even if they can see right on the listing that somebody bought the property for $100,000 less two months ago. I’m just not sure these houses will stay on the market that long, even in the “off-season.”
Personally, it drives me crazy, but I have to be honest (and accepting, sigh) about the fact that I’m just not willing to borrow as much as other people.
Thanks for the linkage Jim.
For your thought #1, while there are banks who are motivated sellers selling since May I definitely don’t think that explains everything. I think it took awhile for the people to realize how little inventory there is on the market.. Once they did that opens the door to some of the more marginal deals.
There are 3 types of values assigned to homes at auction:
1- Value of debt owed.
2- Market Value
3- Market Value minus some discount.
Right now almost all category 3 (I suspect the ones in category 3 have some other issue involved) and some category 2 (bad bpo) are selling. You can generally (somewhat) figure out how a particular home will be priced at auction by looking at how the lender/servicer combination priced before at other auctions. Wells Fargo Home Mortgage combined with Loanstar Trustee Services is a Category 2, for example.
Identifying the Category #3 lenders helps you narrow the field to which homes are most likely to sell for a discount.
Doughboy, so JtR is now the Colin Powell of housing?
edit above: (I suspect the ones in category 3 have some other issue involved)
should be
(I suspect the ones in category 3 that don’t sell have some other issue involved)
There is a #3 in my development and I’m watching it closely.
Hey Jim-
Interesting Chart! As for the investor groups–exactly what we have witnessed–the same groups they have outbid us everytime we have actually gotten to bid–they are willing to go a bit higher that our comfort zone–It seems that they are willing to make $50K off of a $500K property–IMHO–not enough margin for the risk level. Another thing–there seems to be some funny business going on–This Monday, I went out to bid on a condo in San Marcos–late in the action he called off a few “pulled-bids”, one of which was the condo that I was interested in–I confirmed with him that a “pulled bid” meant that it was NOT going for auction for the day–Well, it turns out it did in-fact go to bid and sold that same day??? How does that happen???
What comes to mind when I saw that chart is: are the flipper purchases significantly distorting the number of homes sales statistics?
In other words, is the flipper purchase and then the subsequent purchase by the person who actually wants to live in the home counted as two separate sales? Thus, comparing this year’s number of home sales with prior years would not be an accurate comparison, as we now have this “middle man” type of arrangement for a significant number of the sales.
With the above in mind, comparing the number of homes sales with prior years for determining how healthy the market is – which a lot of real estate gurus have been doing – would not be an apples to apples comparison, in my opinion.
If interest rates were higher flippers wouldn’t be able to buy properties at auction as easily.
Colin Powell?
I just wanted to be the Jim Rockford of real estate.
P.S. If you ever want to try one of his neutral-drop spin moves, practice in a rental car for a while!
Today’s CNN Money headline article: “Buy foreclosures now – before it’s too late”
http://money.cnn.com/2009/08/05/real_estate/buy_foreclosures_now/index.htm?postversion=2009080512
San Diego buyers face the same trend. “Agents have one or two REO listings now, compared with 15 or 20 a year ago,” said realtor Adrianna Delgado of the Delgado Group.
“People feel like they’re getting left out,”
“They tell their agents to make bids right away, as soon as they see something suitable come on the market.”
“Every lender I talk to has been telling me there’s every indication that a tsunami of new properties coming to the market later this fall,”
Being told to buy now before it’s too late. Multiple offers, without even looking at the property. No price negotiations. Bidding wars.
Sounds familiar doesn’t it?
Dead cat bounce coupled with spring fling. Interesting to see what will happen next year.
shadash: High interest rate should not prevent flippers from buying. (They will just demand higher discount) They also have to have cash to bid in auctions. When you won in the auction, you don’t have 24 hours to arrange finance, you have to pay it RIGHT NOW. And no bank will lend them money to go to auctions and bid on a house that the bank has no idea before hand.
Flippers also can not default it like most home owners did. When they buy the house in the auction and then later refinance it to get the money out, they have recourse loan and usually bank won’t lend them 100%.
Pepsi,
You are correct. What I mean is the money being provided to flippers will dry up when people with cash can park it in other things that provide safer/more stable returns. If you could get 12% on bank cd that is fdic insured why mess around with flipping houses?
REO deals and short sales – so very en vogue for today’s trendy homebuyers who are going to steal one from the bank. Seems pretty clear that it’s tough sledding out there. No doubt there are some pros who are making money on flips and the occasional average Schmoe who gets through. For others, there are probably going to be a few fingers getting lopped off as the knife continues its descent.
“You are correct. What I mean is the money being provided to flippers will dry up when people with cash can park it in other things that provide safer/more stable returns. If you could get 12% on bank cd that is fdic insured why mess around with flipping houses?”
LOL. You must be at least 45 years old to remember the last time that happened.
Interesting post. I went to the trustee sale on the steps of the downtown courthouse at 222 W. Broadway today, 8-5-09. About 80 properties were withdrawn from auction at “beneficiary’s request” or “mutual agreement.” The vast majority of the properties that went up for auction went back to their respective lenders as the minimum bids were above market value (including the house I was interested in). Three properties sold to what appeared to be regular “auction bunnies” as the auctioneer, Jay, referred to them. I think in the lower price ranges it will be very hard for an individual purchaser to complete the steps required to successfully bid on a property that interests them:
1. Identifying property of interest
2. Running a title search in a timely manner
3. Trustee setting minimum bid at or (realistically to make it worth the exposure to unrecorded liens from IRS, etc.) below market value
4. Successfully bidding against seasoned auction attendees who often work for investors or companies specializing in this business.
obie619:
Actually, if you overcome the first 3, you can easily outbid the flipper.
Because you are not going to sell it and pay out 6% commission 3 months later.
The flipper must have at least 10% margin (most have 15% in mind and some go over 20%, depending on the house’s price) to even consider bidding on any given house. As a home buyers, you can go with 10 – 15% discount and be happy.
And to overcome 1-3, just hire an experienced Realtor.
I don’t understand why the banks frequently set the minimum above market value (usually the amount owed on the loan). If I was a bank, I would set the minimum bid 10% below market value or so. No contingencies, no escrow, no unsold properties, no price reductions, no 6%commissions, no repairs, no utilites, no gardner, no maid service, just a cashier’s check in hand that day. That’s got to be worth a 10% discount. Now, not every property will get bought, even at 10% below market value (and they might get more if two or more parties are interested in the same house), but it’s worth it to the bank, IMHO, to make an attempt. Why don’t they?
Pepsi,
There are multiple reports of the investor groups bidding higher to squash people’s dreams, and make it up on volume. Probably just an occasional occurance, but I could see it happening.
In my conversations that last time I was on the steps it seemed that investors were happy to see a $50,000 profit, which to me sounds crazy. One or two bad comps in the ensuing month and your goal of $50,000 could end up being barely enough for a steak dinner.
Dead cat bounce coupled with spring fling
It’s August, and the market is much hotter now than March/April. Multiple offers and bids way over list price on virtually anything and everything listed on lower end in every market.
“investors were happy to see a $50,000 profit, which to me sounds crazy.
Depending on the cost of the house, a $50,000 savings sounds pretty good to me as an owner-occupied.
Especially if you are looking in a newer neighborhood where outside of intentional damage repairs hopefully would be minimal.
Even more tempting considering if you wait for it to go REO, you’ll be competing with the current mob flinging offers at everything and everyone.
If you’ve got the cash, seems interesting to me. Maybe I’m missing something?
I guess we can say that the moratorium on nit-picking every word Jim says lasted two days.
I think it is crazy for somebody to buy any house with sole intention to flip it for $50,000 or less. My rule of thumb is $100,000.
Jim,
I’m not nitpicking, and I’m not sure why it was seen that way?
My question is sincere – if I have the cash, and I’m looking in newer neighborhoods what am I missing?
I’ve stated numerous times on this blog, I (and I assume others) are willing to pay more then investors. If they tap out at $50,000 – I wouldn’t, because it’s to live in not flip.
I had never really considered Trustee Sales previously. But all the insanity over REOs, a potential influx of inventory later this year, and some good information from this blog and others have peaked my interest.
As a potential future customer – I’m interested, not nitpicking.
The lack of morals and take-over of investors in the real estate market WILL BE the guaranteed reason why hard working, decent professionals in California will make an exodus from his place…you can bet on it.
RBELLE:
Personally, it drives me crazy, but I have to be honest (and accepting, sigh) about the fact that I’m just not willing to borrow as much as other people.
Nor should you…you’ll come out ahead in the long run.
sdnerd,
If I’m talking about what amount of profit the investors are considering, and then you reprint my remark and make it look like I’m wrong to think that, mentioning that a $50,000 savings is fine, then you are nit-picking my remark.
You make it out that I think $50,000 isn’t an adequate savings, but I wasn’t talking about what an owner-occupier would save – I’m referring to the risk a flipper would take on an immediate re-sale.
It’s been a rough couple of months here on the blog for JtR, and I’m overly sensitive. I wouldn’t pick on Papa Bear for another couple of weeks.
Jim,
I’m not a real estate investor and have zero Trustee Sale experience; I have no idea what an acceptable profit would be for an investor to take on the risk. I don’t understand all the risks.
I was simply trying to state that $50,000 – as an owner-occupied sounds good to me personally.
If I was going to try and insinuate you or someone else were wrong, I at least hope I’d try and do that with some iota of knowledge as to what I was actually talking about. In this case? None. Less then none. So I assure you that was not the intent. 🙂
If that’s how it reads, I do apologize for any misunderstanding. If I could edit my post, I’d re-phrase this or just quote the $50k:
a $50,000 savings sounds pretty good to me as an owner-occupied.
We’re not all here to give you a hard time! 🙂
jim,
thanks for all you share sorry it’s been rough.
But it’ been rough for aspiring homeowners as well.
hang in there,
Coconutz!
Jim:
In my short trip to courthouse, I saw the same thing happen, but I was not surprise. There is a guy buying a 1600sqf house in Mira Mesa for $295K.
It is about right with your observation. For flipping, that price is crazy, but I believe this person is buying it for cash flow. I think that might be the reason behind this “crzay” bidding war at the lower end.
There is very little bidding on the 500K+ or more, because those houses usually does not have positive cash flow.
Thanks sdnerd.
I had a talk with my psycho-analyst (wifey) and she thinks I’m being paranoid, but I told that I’m not, I just think people are out to get me. 😉
I’m trying to find the balance.
If I say nothing, it gets bottled up. If I delete comments, then nobody really knows what the problem is. If all of a sudden I object, then it seems paranoid.
Was I reading more into your comment? yeah, probably, and I’m sorry – it’s not about you. I’m not looking to start a blog crusade, at least not over who said what.
I have to agree with pepsi. A lot of the buyers with the larger pools of money are looking at cash flow with a possible upside 5-7 years dwn the road. That is one of the main reasons they are focused on the lower value properties. You just can’t rent the 500k+ properties to make a decent return.
I’ve seen flippers trying to flip low-end houses out here in Riverside for like $150k (purchased for maybe $100k), which is ridiculous to me, especially since they seem to be fixing them up as well. I simply can’t see the profit there, after transaction costs, and the fact that they might not sell for the price they want for them.
I guess we can say that the moratorium on nit-picking every word Jim says lasted two days.
I think it is crazy for somebody to buy any house with sole intention to flip it for $50,000 or less. My rule of thumb is $100,000.
Jim, are you crazy, I would be willing to flip it for less than a $50K profit. Your rule of thumb seems real high in my opinion.
Can you please explain why?
Nathan:
$50K profit margin maybe great for house under $200K, and might even be fine for house under $300K.
But, there is no way you would want to take that for house above 400K. (unless you know and inspect the house beforehand). $50K margin on a $400K, after commission, you have only $26K left for repair and everything else. So, what if there is a tenant in the house ?
You think $26K is enough to cover your profit, repair and the interest of $400K for 3 months ?
I doubt it.