With the number of property foreclosures nationwide heading upward, some potential investors may be itching to get out there and bid at property auctions.
But that could be a dicey proposition in the New York City area, where real estate experts say foreclosure auctions can be a difficult way to make money, though profits which can typically run more than 30 percent can be lucrative.
Learning to maneuver through the foreclosure system takes time, investors say.
There are four important points in the foreclosure process. There is a summons and complaint phase called “lis pendens,” where the person facing foreclosure can appeal. Then, if the situation is not resolved, there is a judgment of foreclosure followed by a foreclosure auction.
Those three processes typically take 12 to 18 months and can provide opportunities for real estate brokers who can help property owners to sell their distressed properties and avoid auction.
After the auction where typically half of the properties go to investors and the other half are repurchased by the lender properties bought back by the lender (called REOs or real estate owned) become available for anyone to purchase.
New York City’s foreclosure system tends to be unpredictable. A large number of properties foreclosed upon reach the auction block. About two-thirds of foreclosure cases are resolved by the property owner before that happens, and about half of the properties that do end up at auction frequently get postponed and quietly disappear, auction-goers said.
“The truth is, the auction is probably the worst venue for people just getting into the foreclosure market in terms of being an investor,” said Rick Sharga, vice president of marketing for RealtyTrac Inc., a company that tracks national real estate foreclosures.
But some savvy investors have taken the time to learn how to draw profits from a pool of properties in default. Preliminary data assembled for The Real Deal by PropertyShark.com, which tracks foreclosures in New York City, demonstrates that those who purchase properties at foreclosure auctions typically see profits of up to 35 percent. That can be very tempting for those moving into the real estate market.
“When you’re starting out, it’s hard to raise money with no record or experience or history,” said David Goldoff of Goldoff Properties, who has purchased four properties at New York City foreclosure auctions. “This is a way to get started in the real estate business.”
Oz Rabinovitz of Prime Homes Group, which also has purchased many properties at New York City’s foreclosure auctions, said he likes to achieve profits in excess of 30 percent on a property.
But when it comes in foreclosure, there are often added costs.
“There are a lot of difficulties with auction properties,” he said. “You’re dealing with a somewhat hostile environment when you’re buying someone’s home. They or tenants who have been neglected for many years may still be living there.”
But there are very specific conditions that make a foreclosure property a potential gold mine, said Ryan Slack of PropertyShark.com. Typically, these are properties that enter default after many years, often due to some sort of distress on the part of the owner, and the debt owed is small.
RealtyTrac.com provides an estimated value for the full market price of a property, which can then be compared to lien balances.
“That gives the investor a pretty quick read on whether there’s enough equity in the house to make a good investment,” Sharga said.
The coming months may see more foreclosures as a result of bad loans and those are not typically profitable for investors, Slack said.
“Typically, the bank is forced to buy these properties back, as the accumulated fees and interest push the debt above the market value of the property,” he said. “These properties sell for about their value at auction, plus or minus 10 percent.”
While foreclosure auctions can benefit investors, they also can be profitable for lenders, according to PropertyShark.com data. Banks buying back properties in default may lose money on paper to the tune of 4 percent of their original investment.
But in the overheated real estate market of the past decade, they have actually made a profit when fees and other charges are taken into account, Slack said.
“When we researched bank-purchased properties in 2004, we learned that banks have been successful in reselling the foreclosed properties for 10 to 20 percent more than their purchase price at the auction,” he said. “As price growth flattens, banks [will] find that the foreclosure process is no longer profitable.”
Sharga said some banks will bid up the prices at foreclosure auctions.
“This didn’t used to happen regularly, but since property values have been escalating so much, in some cases, banks have actually had agents at auctions bidding on their behalf,” he said. “And they purchase the house back for more than the debt.”
That can give opportunities to real estate brokers when the banks resell those properties. But it’s not such great news for investors.
“The people that control these types of auctions can outbid you and hold the property and bump up the price, and eventually you’re not seeing any type of discount,” said Goldoff, who no longer attends auctions.
Also, there may be too many competing investors to turn a healthy profit these days, he said.
“Three or four years ago, investing made a lot of sense,” Goldoff said. “The reason I got out of it was because the margin for making any money shrunk, because a lot of people started doing the same thing, and the prices start to go up.”