Bargains forecast

After a dry spell, foreclosures are on the rise. But landing a deal requires know-how.
By: Gayle Pollard-Terry, Times Staff Writer: LA Times
WHEN his landlord raised the rent one time too often, John Polite decided it was time to buy. But on a new minister's salary, he would need to find a bargain.

"That's the only way I was going to get into anything," he said.

So in 2002 he did what many wanna-be homeowners have pondered from time to time. He bought a property that was in foreclosure through a real estate agent.

Polite ended up with a bank-owned, 1,400-square-foot town house in Sylmar with three bedrooms, 2 1/2 bathrooms and a patio for barbecuing. The home "was a mess," he said, but it was structurally sound. He paid $137,200, while comparable houses were selling for $230,000. Today it is worth $400,000.

The foreclosure process — initiated by a lender when a homeowner falls anywhere from 30 to 90 days behind on payments — offers several stages at which buyers can make such a bargain purchase: directly from a homeowner whose loan is in default because of missed payments; at a public auction after an owner has defaulted; or through a real estate agent, for property that has reverted to the lender because no minimum bid was made at the auction.

Foreclosures have been at historically low levels during the last few years. Steep appreciation gave homeowners plenty of equity to tap if they got into financial trouble and buyer demand made it easy to sell homes quickly and at a profit.

Since the beginning of the year, however, foreclosed properties have started coming on the market in increasing numbers. Nationwide, they are up 63% since March 2005, according to RealtyTrac Inc., an Irvine-based company that monitors foreclosures. In Los Angeles County, first-quarter figures from Pittsburgh-based Default Research Inc. show a 63% increase in the number of foreclosures from the same period last year. And there are reasons to expect there will be more ahead.

"Over half the loans on the books today are less than 3 years old," said Douglas Duncan, chief economist of the Mortgage Bankers Assn. "Loans tend to peak in terms of going into delinquency in years three to five."

Adjustable-rate loans have become more popular in the last couple of years, he added. These loans tend to have a higher rate of delinquencies than fixed-rate mortgages. Plus, in the last five years more high-risk buyers have qualified for mortgages. "Borrowers who have not always paid car loans or credit card bills on time," Duncan said, "and are at greater risk of missing mortgage payments."

The Sacramento-based website Foreclosures.com also reports more activity.

"Foreclosures are up for the first time in seven years," said President Alexis McGee. "California's been on a down trend, but the numbers are starting to go up."

Those numbers are tempting Tanya McCalebb, who wants to come off the sidelines. A veteran real estate investor, she's in the hunt for foreclosures.

McCalebb bought her first bank-owned property about a decade ago during a buyers' market. She paid $174,000 for a three-bedroom house in Hawthorne and put about $10,000 worth of improvements into it.

"I changed the roof because it needed it," she said. "Nice paint job. Carpet. A lot of cosmetics." She sold it for $225,000.

She bought her fourth and most recent foreclosure five years ago just before the housing market took off and the deals dried up.

When they were plentiful in the early '80s and mid-'90s, foreclosures could be purchased for as little as half of market value, according to Joseph Harrison Soaris, an agent with Keller Williams Realty Marina/L.A. who has been selling bank-owned properties for 25 years. Today, California foreclosures sell on average for 88 cents on the dollar, according to Rick Sharga, of RealtyTrac.com, which collects and sells data on foreclosures from 2,500 counties in the U.S.

Finding residential foreclosures in Southern California requires perseverance.

"The best deals are buying from the owner before the foreclosure," said McGee of Foreclosures.com, "the minute the notice of default is filed."

Notices of default, as well as public auctions of foreclosed properties, for Los Angeles, Orange, Riverside and San Bernardino counties are published in the Daily Commerce, a legal newspaper. The notices, which indicate a homeowner may be headed for foreclosure and a public auction, are also published in the Los Angeles legal daily Metropolitan News-Enterprise and on paid websites such as foreclosures.com, redloc.com, realtytrac.com and http://www.defaultresearch.com .

"Last year, when we pulled defaults in 90008 [Baldwin Hills, Leimert Park], 90056 [Ladera Heights] and 90043 [View Park, Windsor Hills], we had three pages," said Patricia Penny of Pat Penny Realtors. A recent search yielded 13 pages.

Another way to find properties in the pre-foreclosure stage is through word-of-mouth.

Two years ago, Penny, who specializes in southwestern Los Angeles, got an unsolicited call from a man who was losing his home. He wanted her to sell it.

She and her husband, Roland Jones, bought the dilapidated California bungalow for $305,000 — a bargain at that time for a three-bedroom house in the Crenshaw District when comparable homes were selling for more than $400,000.

"It needed a lot of work and updating," Jones said. "We tore the kitchen out … put in better heaters. Had the hardwood floors redone. We fixed up the garage and landscaped it to give it more curb appeal. It sold almost before we finished it."

The couple put $75,000 into the house and sold it for $425,000.

If a defaulting borrower doesn't sell but loses a house, a public auction is scheduled. This is perhaps the hardest stage at which to buy a foreclosure. Public auctions in California require payment by cashier's check for the entire bid. Because the final amount cannot be predicted, buyers must bring one check for the minimum bid, typically the amount owed on the property, and additional incremental checks for any overbidding.

"A lot of people make the mistake of thinking the right place to start is at the auction sale," said Sharga of RealtyTrac.com. But "that's the highest risk point of the foreclosure buying process," he said, because the buyer is limited to a drive-by inspection of the house and doesn't know the condition inside.

"Unless you've done your homework, you could be liable for other liens," such as a second mortgage, he added. "You probably want to work with a professional to get through the first purchase."

That's why home buyers frequently turn to agents.

Polite, for example, learned about his bank-owned town house from an agent who knew a member of his church.

To find properties for his clients, foreclosure specialist Soaris works with 10 banks. When he has bank-owned property to sell, he often turns to repeat investors. He cautions that the homes often are in bad shape.

Of course, not everyone who ends up with a foreclosure started out looking for one. Tom Farrell and Fredrick Stephenson have purchased two. They bought their Palm Springs home a dozen years ago.

"It was owned by a bank in Texas," Farrell said. "They had no idea what they had.

"It was on a big plot of land. It was close to downtown. It has a really neat fireplace."

The pair paid $101,000 for the three-bedroom, three-bath cinder-block home in 1994, when homes with fewer amenities averaged $110,000.

Then eight years ago they bought a cabin in the mountains via foreclosure. They paid $46,000 for a two-story, three-bedroom cabin on three lots in Cedarpines Park.

"There was no doubt this was a bargain," Farrell said. At the time the pair bought, similar properties were going for $80,000.

They heard about both deals from real estate agents.

"Twice, we've been extraordinarily lucky to happen on a foreclosure," Farrell said. "We just stumbled on them."



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Where to look, and how to buy

Want to buy a foreclosure? Here's how the process works in California, according to Alexis McGee, of Foreclosures.com, and Grant Nelson, a UCLA law school professor who is an expert in real estate finance law and property law.

• After the property owner fails to make a loan payment or, in most cases, several payments, the lender sends a default notice to the borrower and anyone who has an interest in the property, such as an institution holding a second mortgage. That notice is filed with the county recorder's office and published in select newspapers and online.

• Ninety days after the default notice is sent, the lender files a Notice of Trustee Sale with the county. The property owner is notified by letter. So are the lenders. The public is notified through ads in legal newspapers that the home will go up for sale within the next two to five weeks at public auction. "Right up until five days before the foreclosure sale, the buyer has the right to pay off all the payments that are late, and certain other costs," to redeem the property, Nelson said.

• After at least 104 days have passed since the original default notice, an auction is held. Bidders are required to pay by cash or cashier's check.

• If no one bids the minimum set by the lender, the property reverts to the lender. At this stage, the home is called an REO (for Real Estate Owned) and can be purchased directly from the lender. Because many lenders use real estate agents at this point, and the properties are listed on the market, these foreclosures are generally the easiest to find.