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Homes for auction, buyer be prepared

It’s been a busy year on the Deschutes County Courthouse steps, where foreclosure auctions are conducted. Few auctions end in a sale, but every once in a while, a fantastic deal comes along. Of course, you need to have the money on you.

By Andrew Moore / The Bulletin

Published: November 22. 2009 4:00AM PST

Before the housing bubble, Paul Helikson, a Bend-based process server, would conduct foreclosure auctions on the Deschutes County Courthouse steps every Friday at 1 p.m. On a busy day, there might be five auctions.

Now, Helikson conducts foreclosure auctions every day at 10 a.m., 11 a.m. and 1 p.m., with an average of 20 homes on the block each day.

With more than 3,100 notices of default — a filing that initiates foreclosure proceedings — recorded in Deschutes County so far this year, Helikson is busy. By comparison, there were 221 notices of default filed in 2006.

But where there’s crisis, there’s opportunity. Usually gathered on the courthouse steps along with Helikson are a small band of investors ready to scoop up properties for cents on the dollar.

They have to pay cash on the spot if they win. They also have to do their research, as a home sold at auction is sold as is, meaning broken pipes, missing appliances and even tax liens are their headaches if they submit the winning bid.

“Caveat emptor fully applies to all the auctions we do, and I think that’s the biggest thing,” Helikson said.

Helikson estimates only 3 percent of the auctions he conducts end with a sale, with the remainder either postponed or concluded without a buyer, meaning the property is turned over to the borrower’s lender.

Occasionally, however, a gem — a home in a good neighborhood or priced far below market value — goes under the gavel.

“There are (incredible deals), said Gene Norton, a Bend investor who’s been attending auctions for the last three months. “But you have to do your research ... it’s a pretty interesting scenario.”

Foreclosure process

Generally, a notice of default is filed against a borrower by the lender’s trustee after the borrower is 90 days delinquent on his or her loan, said Tami MacLeod, an attorney with Karnopp Petersen in Bend who specializes in foreclosures.

The notice must be sent to the borrower via certified mail as well as physically served to the property. On occasions when the home is vacant, the notice is posted on the property after the third attempt. The notice also must run once a week for four weeks in a local general circulation newspaper.

In addition to notifying the borrower that his or her loan is delinquent, the notice also lists a time, date and location for a sale of the property by auction if the loan is not brought current.

By law, the trustee must wait 120 days from the date the borrower is notified to conduct the sale. Therefore, the sale is set roughly 150 days in advance of the filing date, in case there are delays in notifying the borrower, MacLeod said.

During those 150 days, borrowers can attempt to remedy their default by bringing the loan current, either by catching up their payments or by working out a loan modification with their lender. A borrower also can sell the home to satisfy the default.

In cases where the likely sale amount is less than the loan amount — which has become common in the last two years due to the steep depreciation of home values — the borrower also can work out what’s called a short sale with the lender, whereby the lender agrees to forgive the amount of the loan not satisfied by the sale.

In years past, such forgiveness was treated as income by the Internal Revenue Service, but the rule was relaxed by Congress in 2007 and applies through 2012.

If there is no remedy for the loan in default, the home or property goes to auction.

Auction process

Before the auction, the trustee, in consultation with the lender, sets a minimum bid, according to Helikson, who is hired by trustee companies to conduct their auctions. The amount is either posted a few days before the auction or, in some cases, is phoned in to Helikson minutes before the auction.

Most trustee companies have Web sites where they list foreclosure auction properties and their minimum bids. A prominent site is www.usa-foreclosure.com.

Generally, the minimum bid is the amount of the outstanding loan plus any interest, late fees, lien amounts or costs the trustee accrues arranging the auction. By law, banks can’t ask for more than that, MacLeod said.

However, Ryan Strasshofer, a principal with Gorilla Capital, a Eugene-based company that buys homes at foreclosure auctions in Deschutes County and 14 other counties in Oregon, said more lenders are discounting their minimum bids to entice buyers.

“(Banks) are essentially trying to recoup as much money as they can and are using trustee sales more than ever before to get rid of these properties,” Strasshofer said. “They are maxed out on inventory and would rather take $50,000 at auction than spend $20,000 to clean (a house) up and list it to make $60,000.”

Strasshofer said his company, which also operates in Idaho and Arizona, has purchased homes at auction for as little as 30 cents on the dollar.

“The fact is that with most notes out there, the note is worth more than the value of the property,” Strasshofer said.

MacLeod confirmed that she’s noticed more banks lowering their minimum bid to less than what they’re owed on the mortgage.

“I saw one where the (minimum) bid was $100,000 less than what was owed,” she said.

Walter Molony, a spokesman with the National Association of Realtors, said the foreclosure auction market nationwide remains small, comprising only 1 percent of sales volume, he said.

While foreclosure auction prices may sound appealing to some, MacLeod warns anyone interested in purchasing a home in a foreclosure auction to research the property as much as possible. This can be difficult considering it’s impossible to authorize an appraisal without the owner’s permission.

“Bidders on the steps need to be careful about it (because) these are not your typical sales,” she said. “Odds are you have never set foot inside the house, have no idea what condition it’s going to be in ... and it’s not uncommon for people to strip their houses (before they leave), so it’s a buyer-beware situation.”

Said Strasshofer, “We put a lot of time into research.”

Reading the scripts

Helikson said a common misconception among people new to the process is that bidding starts at zero, which is never the case.

When the hour of the auction begins, Helikson begins reading the “scripts,” as he calls them, the legal documents that announce the sale, identify the property and spell out the terms, mainly that a successful bidder has to pay in cash and is purchasing the property with no guarantees.

Helikson speeds through these, having nearly memorized them in the 20 years he has conducted foreclosure auctions.

The “script” also calls for any interested bidders to pre-qualify for an auction. In other words, bidders must prove to Helikson they have the money on their person and can turn it over immediately after the sale is concluded. Only cash or cashier’s checks are accepted.

“Most people know what the (minimum) bid will be and come with that plus a buck,” MacLeod said.

But sometimes, knowing how much cash to bring can be a quandary for bidders if the minimum bid is not made known until minutes before the auction or if they suspect a bidding war might break out.

In such cases, bidders usually bring a cashier’s check for what they guess will be the minimum bid amount as well as cashier’s checks in smaller increments that they can add on.

Helikson doesn’t make change, so any amount submitted over the winning bid is returned when the title is transferred, which must occur within 10 days of the sale, MacLeod said.

As Helikson works his way through his auction scripts, a familiar refrain is, “Going once, going twice, going three times, going back to beneficiary,” meaning the property has not sold and becomes the property of the lender.

Another familiar refrain is the announcement of a postponement. Banks often postpone auctions because they are still sorting through a short-sale offer or some other contingency, MacLeod said.

But banks can’t postpone an auction forever. If they have not conducted an auction within 180 days of the auction sale date listed on the default notice, they are required to rescind the notice and start the whole process over, MacLeod said.

If a home isn’t sold at auction, the lender takes ownership.

Tom Unger, a Portland-based spokesman with Wells Fargo Bank, said the bank tries to list a property after the auction “as soon as possible.” Unger said some homes are easier to list than others depending on what sort of cleanup needs to be performed, but the goal is to get houses listed with a local real estate brokerage quickly.

Molony, with the National Association of Realtors, pegs the number of bank-owned properties currently sold nationwide at 20 percent of all properties.

Sheree MacRitchie, a Bend Realtor who will assume the presidency of the Central Oregon Association of Realtors in 2010, said the number in Bend is roughly 35 percent.

Foreclosure impact

Helikson, whose company also serves notices of default to borrowers, estimates half of the notices he serves are on vacant homes, indicating to him they were either purchased by investors or homeowners who have walked away from their home.

Of the remaining half, 25 percent are served to owners still in their homes and the other 25 percent on renters living in a home that is being foreclosed on.

There have been lots of investors who have defaulted on homes, said Helikson. He can tell because he’ll recognize the same name on different properties. Some names he’s read 10 or 15 times, he said.

He said he doesn’t feel sorry for them, but he does feel for the families that have lost their homes.

On occasion, homeowners will come to their home’s auction to witness the event but generally do so quietly, Helikson said.

“They’re wanting closure, or want to know how long they have to move out, but typically people aren’t too mad because the process has been drawn out so long,” Helikson said.

The flip side, he notes, is all the homes that go through foreclosure re-enter the market at prices that are more affordable, which helps the community in the long run.

“First-time homebuyers are doing very well in this market,” Helikson said.

The median price of a single-family home in Bend rose in October to $220,000 on sales of 175 homes, the most in any month since August 2006, according to the Bratton Report, a monthly real estate sales analysis released by the Bend-based Bratton Appraisal Group.

Median prices for single-family homes in Bend have twice dipped below $200,000 in the last six months. At the market’s peak in May 2007, the median price was $396,000.

The collapse of the housing bubble also has helped Helikson’s company, Tri-County Legal Process Services. It has doubled in size the last two years, from approximately six employees to 12. Helikson estimates he conducts 75 percent of the county’s foreclosure auctions.

Another company that conducts foreclosure auctions in Deschutes County is Central Oregon Legal Services.

MacLeod’s firm, Karnopp Petersen, also conducts some foreclosure auctions for Bank of the Cascades.

Strasshofer said Gorilla Capital is the state’s largest buyer of homes from foreclosure auctions. While the company is profit-driven — its goal is to resell properties within 30 days after purchasing them at auction with a markup of as little as 10 percent of the purchase price — the company helps communities by quickly converting foreclosures into occupied homes, he said.

Gorilla, whose business model is dependent on volume, often resells its homes to buyers who have secured traditional financing, which includes many first-time homebuyers, Strasshofer said.

“We’re getting these things cleaned up and back on the market,” he said.

For investors like Norton, homes purchased at a foreclosure auction can be lucrative as rental properties. That’s because most of the rent is positive cash flow since there’s no underlying mortgage to service after buying the home with cash. Also, because of the discounted purchase price, the homes have a better chance to be sold at a profit as the market rebounds and home prices increase, Norton said.

“You have opportunities for short-term gains and long-term gains,” he said. “You make a little bit of money while waiting to make larger sums of money later, and that might take eight to 10 years, so you have to be prepared, (but) I’m a very conservative investor. The best deals may still be down the road.”

Nationally, more than 14 percent of homeowners were behind on their mortgage payments or in foreclosure in the third quarter, the Mortgage Bankers Association reported Thursday, indicating many more foreclosed homes could yet hit the market.

In Deschutes County, the pace of notices of default filings appears to be slackening, though it’s not yet a trend. There were 310 notices of default filed in September, 261 in October and 180 through Nov. 19.

With unemployment figures still high and affecting a broad group of homeowners beyond those who took out risky loans, Helikson looks to remain busy for a while.

“The thing that sticks out the most is a year and a half ago, it was usually lower-end homes (at auction) and now it’s homes over the whole spectrum,” Helikson said. “There’s not a community that hasn’t been affected by this, from million-dollar homes to $100,000 homes to business complexes to apartment complexes. The whole spectrum is being foreclosed on.”

Andrew Moore can be reached at 541-617-7820 or at amoore@bendbulletin.com.

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