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Foreclosure auction deals? Not these days
Frank McCombs loads his belongings into a trailer on Wednesday after his home was bought by the bank in a foreclosure auction.
Carlos Baez/Special to The SunPublished: Monday, March 23, 2009 at 6:01 a.m.
Last Modified: Sunday, March 22, 2009 at 10:54 p.m.
After hearing that a customer of his Alachua auto electrical shop was losing his house in foreclosure, Kenneth Polk thought he would buy it and other houses for a bargain at foreclosure auctions and rent them out as cheap housing for people in need.
But he learned what former bargain hunters already knew: There are no longer any deals at foreclosure auctions.
That's because banks bid up to the amount of what they are owed on the mortgage, plus attorney's fees and other expenses of the foreclosure process. More and more often, that amount is more than the house itself is worth because of declining home values.
In the Gainesville area, home prices declined 7.5 percent between December 2007 and 2008, according to real estate data company First American CoreLogic. At that time, nearly 18 percent of local homeowners with mortgages were underwater on their home, meaning the amount they still owed was more than the house was then worth. Another 6 percent were within 5 percent of being underwater.
A great many in a negative equity situation bought at the height of the market from 2004 and 2006. Not everyone who is underwater is in danger of defaulting on their loan. But those who lose jobs, face medical emergencies or other expensive life-changing events may be.
Many foreclosure auctions are canceled because the homeowner declares bankruptcy, works out a payment plan, refinances, sells the home in a short sale or catches up on payments.
Those that proceed through the foreclosure process go to auction at the courthouse before court clerks. If nobody else bids, the bank will usually put in a token $100 bid.
In markets with a lot of foreclosures, the homes are adding to an already large inventory of unsold homes, contributing to the decline in home values.
Foreclosed houses that sit empty and deteriorate can also lower the value of neighboring houses.
Underwater homes also are leading to more short sales, in which the bank agrees to accept less than what is owed before debt-strapped owners get to the foreclosure stage.
Alachua County currently has 57 short-sale and bank-owned listings representing 3.7 percent of the 1,551 total single-family residential homes for sale through the Multiple Listings Service, according to Craig McCall, Realtor with Prudential Preferred Properties and president of the Gainesville-Alachua County Association of Realtors.
Last year, 27 short sales and bank-owned properties went on the market. Already, there are 30 new such listings this year.
The foreclosures are spread throughout the county, with higher concentrations where the populations are most dense, but particularly in northeastern and southeastern Gainesville. They are listed from $58,000 to $799,000, McCall said.
There likely aren't enough foreclosures in Gainesville's market to significantly affect home prices, according to Wayne Archer, director of UF's Bergstrom Center for Real Estate Studies.
Foreclosure filings - from late payments and auction notices - were up 50 percent in Gainesville from January 2008 to 2009, with 117 filings this year, according to the Alachua County Clerk of Court's Office.
"You're just starting to see the cycle of adjustable-rate mortgages being foreclosed on, at times without even a payment being made on them," said Steve Lehr of Lehr's Process Service.
Lehr serves foreclosure notice papers and represents attorneys for banks at foreclosure auctions, carrying out their instructions for bidding on properties foreclosed by the banks.
Lehr said five to 10 bidders used to come to foreclosure auctions at the courthouse, but they gradually dwindled away starting a couple of years ago.
One regular bidder was Jimmy Carnes, a former University of Florida track coach.
Carnes said he and the other bidders would buy lower-priced homes, spend $10,000 to $15,000 to fix them up and sell them "pretty fast."
He stopped a year and a half ago and is still trying to sell a few that he is renting out.
"They sold for normally what the loans were. Then of course it got to the point where the houses weren't worth what the loan was only because prices had gone down so much," Carnes said.
At the same time, Lehr points out that overall economic conditions make bidders less willing to take a chance.
"They don't want to get stuck with a house without being able to sell it," he said.
These days, Lehr said the auctions mostly draw spectators. A lot of people hear infomercials and have tapes about how to make money off foreclosures, he said. They show up, observe and don't come back.
Polk, who owns B&K Rebuilders in Alachua, talked to a customer who was going through foreclosure and thought he would try to buy his house and others, then rent them out.
"I was hoping to have cheap rent to get people out of being homeless," he said. "A lot of people are needing help right now with somewhere to live."
A good deal, Polk said, would have been anything below $100,000 for a home appraised at $120,000 or $130,000. But he found that the banks were willing to bid higher since they were owed more.
Polk's customer, Frank McCombs of High Springs, said he had been through the foreclosure process once before, but it was canceled in November 2007 when he and the bank, Deutsche Bank National, agreed to a payment plan. The bank started foreclosure proceedings again in July. It was auctioned on Feb. 17.
With Polk bidding, the house ultimately went back to Deutsche Bank on a bid of $26,000. McCombs owed $164,000.
Polk said he bid on about 20 properties on different days, all going to the bank.
McCombs' home was one of 20 auctioned the week of Feb. 15, with outstanding debts ranging from $61,000 to $393,000. All 20 went back to their banks, at bids of $100 to $45,000. The banks would have bid higher - to the amount of the debt - if other bidders had raised their bids.
The banks do not have to pay themselves for the high bid. The only cost is the document stamp fee on the title that is a percentage of the final bid.
Lehr said the banks would love for someone to outbid them on every home. That way, they get paid what is owed, the defaulted homeowner gets the difference above that and the bidder gets a home.
Once a bank does own the home outright, it goes on the market like any other home for sale so the bank can get its money back.
Banks try to get market value, but if a buyer knows the bank owns it they negotiate harder because they think the bank is a "highly motivated seller," said Tom Mallini, president and CEO of M&S Bank.
Banks are not as motivated as people think, he said.
"They think there's a bargain there, but we've got five years to liquidate it, so we can wait until the market comes back," Mallini said.
M&S does not currently own any foreclosed houses, he said.
"Some banks are more motivated than others. It depends on the volume of foreclosures and other real estate that they own," Mallini said.
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