The New Land Grab: Profiting from Foreclosures
Business + Economy

The New Land Grab: Profiting from Foreclosures

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In the shadow of a Phoenix courthouse, the nation’s housing crisis plays out daily at numerous foreclosure auctions where one homeowner’s loss is someone else’s win.

As the national foreclosure rate edged slightly higher in the third quarter, according to the latest data available from RealtyTrac, here in the capital of Arizona—a state that has one of the highest foreclosure rates in the country—the competition to grab real estate at bargain prices was on view every day of the week, from morning to late afternoon. On a typical day, the food court in front of the Maricopa County Courthouse swarmed with would-be buyers—mostly men, mostly in their late 20s and early 30s, wearing T-shirts and shorts or jeans. With ear buds plugged into cell phones and hands gripping shiny laptops, bidders came early and often to vie for hundreds of abandoned houses in the region. In August, buyers snapped up some 1,500 such properties at auction. Last month, another 1,200 changed hands in these public sales.

Over the last few years, the handful of potential buyers who showed up at the auctions has skyrocketed to include not just locals, but also many out-of-state agents and foreign investors looking to grab a good deal. Some of the buyers are individuals looking to buy a property to keep or flip, but many others are part of investment groups looking to profit from the housing bust. Show business has taken notice of the frenzy. Talk abounds that a reality show for a national television audience is in the works, though filming has yet to begin. Until the housing bubble burst, ushering in a deluge of foreclosures, the trustee sales at the courthouse were “a little bit of an underground gold mine,” said Shane Fairchild, a regular bidder.  Clearly, that is no longer the case.

Foreclosure rates nationwide had slowed since 2010, with 11 straight months of year-over-year declines as lenders delayed new filings after rampant documentation problems and so-called robo-signing, in which bank employees approved foreclosures without properly verifying basic information, came to light. Across the U.S., the number of scheduled foreclosure auctions fell to 84,405 properties in August, a drop of 1 percent from July and a 43 percent decrease from August 2010 figures, according to RealtyTrac.

Now as large lenders like Bank of America start to ramp up foreclosures once again in hopes of clearing that backlog, activity could edge higher once again, even if it remains well below peak levels. The number of U.S homes entering the foreclosure process jumped 14 percent from the second quarter, according to data released by RealtyTrac on Thursday. (The alternative, however, is to go with the plan being enacted in Cleveland, where if the banks can't sell the properties, they bulldoze them rather than having them sit as eyesores in disrepair. )

At the county courthouse in Phoenix, the stream of foreclosures translates into brisk business. Depending on the intensity of the bidding on any given day, Shane Fairchild, who works for a local real estate broker, said the number of properties he chases and lands can vary wildly. “We could have up to 10, 15 on our bid list for the day and we may get 2, 3 or 4. Obviously, the more we get, the happier we are and the happier our clients are.”

Sitting at a nearby table, Ernesto Paz had a smile on his face. He had just gone head to head with several other bidders and emerged a winner. He figures the house he bought for $146,000 is worth at least $44,000 more. He was buying foreclosure homes long before the new crop of investors arrived in the state. “I usually bid on anywhere from 15 to 20 properties per day,” said Paz, who buys properties for himself, his friends and clients seeking to rent the houses or flip them for a profit.

He insists that, contrary to public perception, investing in foreclosures houses is anything but a get-rich-quick scheme. “People think that it’s pretty simple,” he says, with a hint of annoyance. “They just come down here, bid on a property and they think they’re getting a deal but that’s not necessarily the case. There’s a lot of due diligence that goes into purchasing these properties.” Before Paz make a bid, he and his associates must whittle down a long list of hundreds of properties scheduled for sale (up to 1,400 sometimes) into a "hot sheet" of about 50 to 60. Then drivers check selected properties to ascertain whether they might be worth an investment. After the sale, needed repairs must be made. But Paz is not complaining. Of more than 300 foreclosure properties he has bought, he says he has sustained a financial loss on just two.

Behind Paz, Kristie Austin speaks into her cell phone in a hushed voice, then jumps from her chair and joins a group surrounding an auctioneer. The opening bid on this particular house is $161,500 and quickly rises as bidders try to get their best dollar in. Austin was ready to pay a $10,000 deposit and the balance in cash the next day. But after a duel with another bidder, she couldn’t beat his high bid of $217,100.

“That was a nice one,” she said.

Arizona law dictates that lenders attempt to sell foreclosure properties through a trustee sale and notify borrowers of scheduled auctions, so it’s not uncommon to find distressed homeowners at the courthouse.

“We get a lot of people that come down here and they’re mad at us for buying their houses,” Austin said. “But we’re not the bad guys; get mad at the banks.”

Since May, Austin has bought dozens of houses for a California real estate investment company, but she has not acquired any for some weeks. Stiff competition already is driving up prices and she thinks a reality show, if it happens, could mean even more bidders.

“I have a feeling it will be made to look a lot simpler than it is,” she said. “And then we’re going to be infiltrated with people that don’t know what they’re doing.”