Savvy investors profit buying foreclosure homes

GREELEY – It’s Wednesday morning, and as 10 a.m. approaches in the Weld County public trustee’s office, four chairs are arranged in a corner for foreclosure-auction buyers who, on this morning and many others, never show.

“Sometimes we don’t get anybody or it’s mostly what we call lookie-lous,´ said Susie Velasquez, Weld’s public trustee since her appointment by Gov. Bill Ritter in March.

Those “lookie-lous” can be owners of foreclosed homes, people facing foreclosure or possible investment buyers. Foreclosure sales are held every Wednesday, and on this day 43 properties will go back to their lenders, who generally bid what’s owed on them.

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It’s a scenario that’s repeated week after week. Weld County has one of Colorado’s highest incidences of foreclosure, with one in every 124 households at some point in the foreclosure process.

Through the first quarter of 2007, Weld County had nearly 650 foreclosures with only 17 properties eventually redeemed by their owners through missed back payments and penalties paid to the lender, usually through a refinancing. That’s a redemption rate of less than 3 percent.

Third-party buyers sometimes make a bid on a foreclosed property. If that is the highest bid received that day, the investor must come to the trustee’s office later that same day with a check and certified funds to back it up. The homeowner then has 75 days to redeem the foreclosed property. If they do not, the investment buyer becomes the new owner.

But if no one’s interested in the foreclosed property, it goes back to the original lending institution. That’s happening a lot these days, Velasquez says.

“There’s just not any profit in the foreclosure sales,” she said. “It would take too much to fix it up and make a profit on it.”

In most cases, it’s because the homes have been refinanced to the hilt and have no equity left in them. The money owed on them is more than their appraised value.

The lending institution then hires a real estate agent to market the property in an attempt to get as much as possible out of it. It’s at this point that the savvy buyer can step in and make a killing.

Settling for a loss

Kathi Williams, director of the Colorado Division of Housing since 2003 and a former real estate agent who once worked with foreclosed property, said a depressed housing market like the one currently existing in Colorado can influence banks and other lending institutions to sell property at $20,000 to $40,000 less than what’s owed on it.

“Their money is tied up and not earning anything, so they’re willing to take the loss,” she said.

Buyers include investors and homebuyers who have researched the property and can make an offer – sometimes in cash – to the institution, which mostly wants to clear the foreclosed property off its books.

“It depends on what part of the state the property is located in, what’s happening in the neighborhood, what’s happening with local property values,” Williams said. “If things look good, they’ll hold onto it for a while. If not, they’ll take the loss to get rid of it.”

That’s because it’s costing the lender money every day to sell the house, maintain it, pay taxes and other expenses. “Banks are very good at collecting payments but not so good at owning real estate,” Williams said.

And it’s usually the investors, sometimes called “house flippers,” who end up making a tidy profit on a foreclosed house. “We have in the industry what we call the bottom feeders, who know how to make an extremely good buy,” she said. “They’ll try to negotiate directly with the owner if there’s any equity and, if not, deal directly with the (lender).”

Williams said flippers routinely can make profits of 20 percent on foreclosed properties, and that in the case of some deals,  “they’ll make up to 40 percent profit.”

Don’t walk away

Williams said people facing foreclosure should always seek help and never walk away from a property assuming they’ll not face any consequences other than a black mark on their credit report.

Owners of foreclosed property could be sued for losses incurred by their lending institution on the final disposal of the property, Williams noted. They also face tax liabilities for the amount of money written off the final sale price.

“I think the unfortunate part is even if the lender writes off $20,000 to $40,000, it will get reported to the IRS as a gain and (the former owner) will have to pay tax on it,” she said. “That’s why it’s so important that they get in touch with a housing counselor or their lender and not just walk away.”