Sold! That’s a word that usually gets hearts racing with delight, particularly in the real estate profession.
But the term has an added dimension when it’s shouted during a foreclosure auction. It can mean great profits for savvy real estate investors and great hardship for those who lose their homes through nonpayment of a mortgage, property taxes or common charges.
With a foreclosure rate of about one in every 690 households, New Yorkers are less at risk of suffering foreclosure than other areas in the country. Individually, one out of every 1,840 New York City property owners goes into foreclosure a relatively low rate.
Yet, as residential real estate markets nationwide wrestle with a possible slump, many market-watchers anticipate a rise in the number of foreclosed properties, even in New York City.
“A lot of people think that New York is different from the rest of the planet,” said Ryan Slack, chief of Property Research Partners LLC, which offers PropertyShark.com, one of the few in-depth resources for New York City foreclosure data. “But foreclosure happens everywhere, and it typically happens in poorer areas.”
That’s true in New York City.
Brooklyn and Queens see the highest rate of foreclosure in the five boroughs, accounting for about 70 percent of all of New York City’s foreclosures, according to PropertyShark.com data compiled for The Real Deal. But New York City as a whole is largely insulated from national foreclosure trends.
Since in New York much of the product is co-op versus condo or single-family homes, I think that we have a stronger borrowing group than in the suburbs,” said Melissa Cohn, president of Manhattan Mortgage. “I would venture to guess that the foreclosure rates are significantly lower here in New York City than they are in the tri-state area and the rest of the country.”
(Cohn’s guess is correct: Estimates put the national foreclosure rate at more than 15 percent higher than that of the city’s.)
Brooklyn and Queens also have the most organized foreclosure auctions within a system that is no less than chaotic. Auctions in Manhattan, the Bronx, and Staten Island are so informal that they can be difficult to find for anyone but the experienced auction-goer.
Thus, statistics gathered from foreclosure auctions may have shortcomings as indicators of the real estate market. Even documented increases in foreclosure rates may be misleading, say some experts.
“I think the only way to get a real indication of what’s to come would be to talk with the servicing departments of various banks that track delinquencies,” Cohn said. “What’s interesting about the New York marketplace is when there are foreclosures, they tend to get sold through real estate brokers, and it’s done quietly. So even if they increase, you won’t know about it.”
Slack agreed that about 60 to 70 percent of the properties foreclosed upon never make it to auction. And many that are eventually publicized never appear on the auction block.
Still, some of the trends that Cohn, as a mortgage expert, has intuited are borne out by PropertyShark.com data. For instance, marginal areas saw the highest number of foreclosures.
In the past 12 months, Queens accounted for 37 percent of New York City’s 4,386 foreclosures; Brooklyn ran a close second at 32 percent; and the Bronx was third with 19 percent.
The highest rates of foreclosure in New York City are seen in emerging neighborhoods such as Bedford-Stuyvesant, Bushwick, and Jamaica in Brooklyn and Queens, according to a map prepared by Property Shark. But not all neighborhoods considered to be “emerging” by real estate professionals saw high foreclosure rates. The long-suffering and possibly gentrifying South Bronx saw lower rates of foreclosure than the mid-Bronx and the wealthy northern Bronx, because it has more renters and larger buildings, which are less likely to go into foreclosure.
Though Manhattan has low foreclosure rates, its developing neighborhoods are most vulnerable. Washington Heights saw the most foreclosures, followed by Central Harlem.
Manhattan accounted for only 6 percent of city foreclosures despite its high property sales prices or perhaps because of them.
“Outer boroughs experience four to six times the foreclosure activity seen in Manhattan,” Slack said.
One reason for that may be the high percentage of cooperatives in Manhattan, which are difficult to foreclose upon.
Also, property owners threatened with foreclosure are given ample warning and have options to fix the situation. In Manhattan, valuable real estate gives owners the incentive to ward off foreclosure, and they may have a better ability to do so.
“Generally speaking, folks in Manhattan are not going to let something go into foreclosure,” Slack said.
Cohn agreed. “Buyers and bankers are more sophisticated and work harder to protect their property,” she said. “Especially as the new bankruptcy laws, which took effect a couple of weeks ago, make it a lot tougher for people to go into bankruptcy.”
The law, passed by Congress seven months ago, increases the costs and steps involved in filing for bankruptcy. Bankruptcy can stall or derail foreclosure, meaning that homeowners may now actually be more exposed to foreclosure proceedings.
Foreclosure in New York City is generally a residential proposition, with few commercial property owners pulled into situations from which it is the only resolution. “Overall, only 3.8 percent of foreclosures are non-residential,” Slack said. “You just don’t see office buildings being foreclosed upon.”
The types of buildings in New York City most likely to go into foreclosure are smaller ones single-family to four-family buildings, cooperatives and condominiums, he said. It’s only in Manhattan that buildings of five or more families make up a significant percentage of foreclosures, at 52.8 percent.
Other boroughs see much higher rates of foreclosure for single-family and two-family homes.
“Predominantly, we’re talking about individual homeowners not LLCs [limited-liability corporations a common partnership structure for real estate ownership] and investors who, for whatever reason, can’t pay [their debts],” Slack said.
Since smaller properties are typically the ones foreclosed upon in New York City, the average amount of money owed on a property that goes into foreclosure is relatively small at $238,981. In Manhattan, that figure is a bit higher at $299,818 but it’s still dwarfed by property values.
“Compared to the average price of a home these days, the lien seems pretty low in New York City,” Slack said.
That can make New York City a lucrative area for investors who hope to capitalize on foreclosure properties.
Though PropertyShark.com’s data on the profits of foreclosure investors is still preliminary, it indicates that the average investor makes a 34 to 35 percent profit on a property purchased in foreclosure.
At least one investor who has frequented foreclosure auctions, primarily in New York since the 1990s recession, agreed with that profit margin.
“We’re shooting to make no less than 30 percent on our investment,” said Oz Rabinovitz of Prime Homes Group.
Data from PropertyShark.com shows that, while the city’s average mortgage hovers at $600,000, the average purchase price of a building in foreclosure is about $350,000, so there’s ample room for profit.
That margin may be shrinking, however.
“Obviously, as interest rates go up, and the economy weakens, you’ll see more compromised credit,” Cohn said. “The average profit margin is going to change as the market changes.”