It’s late in the Summer and temperatures are hitting 100 degrees. A few people are setting up large beach umbrellas in a tall tree planter. Others are unfolding beach chairs. Someone is dragging a large cooler full of beverages and food for the day. It’s not an unemployed broker’s beach paradise, but the west steps of the County Courthouse in Norwalk – the largest property auction of our lifetime. On an average day $30 Million of Trust Deeds are sold. The daily street auction is unsanctioned by the government and there is no institutional oversight. Day after day, it is the lender’s clearinghouse of foreclosed mortgages where clever real estate buyers stuff their portfolios full of cheap property. It’s a feeding frenzy of real estate bargains that may never be repeated.
Even though the sale takes place under tattered canvas and bidders are mostly clothed in shorts and sandals, it doesn’t mean the bidders are naive. Just the opposite. Many are armed with bluetooth headsets, tough book computers, and researched spreadsheets. The bidders are linked to their investors who have accumulated large pools of money to purchase property at 50% discounts. The sheer number of properties being sold, distant locations to underwrite, and fast pace requires competence and organization. While several websites like Foreclosure Radar and REtran monitor the data, it’s the buyer’s experience in building, marketing, and financing that is essential.
Sales are closed in real time without due diligence. Many investors monitor simultaneous auctions in Van Nuys, Pomona and other county locations where vast foreclosures occur. Some buyers simply come to the sale with a list of properties and their top price. Others are evaluating on the fly while their associates are scouting the sites to make sure the properties aren’t damaged. While on-site bidding increases by hundred dollar increments, the investors use the precious few minutes to make final decisions.
For years, late night pitchmen showcased the money making potential of foreclosures. Most viewers felt misled because there were no distressed properties. Finally, the foreclosure charlatans have been vindicated. It’s true. There’s a lot money to be made buying foreclosures. Latest statistics show 10% of L.A. County homeowners have received delinquency notices. Still with hundreds of properties being sold on a weekly basis only a very few buyers can participate. It’s all cash at the sale and you need to show your funds before the bidding starts. On sale days, millions of dollars in Cashiers Checks are stuffed into worn envelopes, but they reside in only a few hands.
There is no competition from institutional investors. Decisions are instantaneous and although total sales volume is high, each property is too small for large organizations to analyze. As it stands now, the best buyers are smart entrepreneurs, many from distinct ethnic backgrounds. Armenians buying Glendale, the Chinese in the San Gabriel Valley, and Persians covering Beverly Hills. A few years of this business and fortunes are made.
Meanwhile, plenty of mistakes occur. Many properties are purchased too early in the cycle only to see values fall farther. But with 50% margins, these buyers can drastically undercut the average homeowner. They are not trying to resell at the market price, but only at a profit. It partly explains the downward cycle. In many markets, pricing is being set at the foreclosure level. While a few buyers will rent the properties and enjoy the cash flow. The majority will flip so they can redeploy the cash into new bargains. Occasionally, commercial properties are purchased, but most of the behind the scenes activity occurs a few blocks away in the County Recorders Building.
Normally, the Recorders Office wouldn’t cause much excitement. It houses marriage certificates, fictitious business names, and voter information. Occasionally there’s an Erin Brockovich wannabe (dressed as such) investigating a major cover-up and announces the expose on her cell phone. But in Foreclosure Land, the Recorder is the source of all the loan and contact information for the lender, junior note holders, plaintiffs, and property owners. Often immediately before the foreclosure, there’s a lot of scrambling with note sales, substitute trustees, bankruptcies and lawsuits. And after the sale, the Trustee Deed is recorded by the new owner. In the past, Title Companies would simply email the documents, but with California’s ill conceived Senate Bill 133, it has restricted Title services and many active buyers find it more comprehensive to go to the Recorder in person. Even with Erin’s investigatory skills the trail has many dead ends because of litigation, environmental, and excess debt.
Once the property becomes bank owned, it’s generally not an immediate bargain. The bank will first try to get a price that covers the loan. Normally the price is too high and the overwhelming bet is against the banks ability to reach par. Chock full of non-performing assets, the banks become a large repository of problem properties. They are hamstrung by capital ratios because too many write downs lead to closure. At the same time holding problem real estate ties up capital and will also bring ruin. The government delays the day of reckoning by suspending mark to market accounting. TARP infusions have also provided limited stability. With additional time, there is the hope that the market improves and new capital can be raised. But as prices continue to decline, the waiting game is fraught with risk because less money will be ultimately realized. A few clever buyers are able offer the bank something of value in terms of a profitable banking relationship to help offset the loss. But it appears the end game for many banks will be failure. Once a new financial institution is found to purchase the failed bank’s assets, the new bank will will receive a substantial discount generously aided by a loss sharing agreement from the federal government. This means the taxpayer will absorb the majority of the losses and the new property buyers will be able to finally purchase at realistic prices. It may take a while longer, but here in foreclosure land, commercial buyers will eventually see bargains just like the bidders on the steps of the Norwalk Courthouse.
