With house flipping making a comeback, more and more bidders are flocking to public auctions of foreclosed homes such as this one in San Mateo, Calif., where more than 487 homes were on the block for a five-day event earlier in the year. © Justin Sullivan/Getty Images
Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.
Jon Mirmelli, a Phoenix real-estate investor, learned late on the morning of Sept. 28 that a never-occupied custom house on the northern fringes of Scottsdale, Ariz., was going up for auction around noon the same day. The six-bedroom home, built on a three-acre desert plot, has a kitchen with two dishwashers, four ovens, "antibacterial" copper sinks, and a master "spa" bathroom with space for a flat-screen TV visible from the tub.
The minimum bid, as set by a unit of Citigroup Inc., which had a $1.3 million mortgage on the home, was $379,900. After several minutes of bidding among investors and their representatives, some wearing shorts and flip-flops, Mirmelli won the home for $486,300. A week later, he agreed to sell it for $690,000 to a woman who moved in this month.
During the housing boom, millions of Americans tried to make money by buying and then quickly reselling new houses and condominiums. That kind of flipping stopped several years ago, as home sales stalled amid a surge in foreclosures and curtailed lending.
Read: Five mistakes that make house flipping a flop
Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves.
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Investors compete mostly with other full-time professionals who monitor foreclosure auctions at county courthouses across the country. The bidders often haven't had a chance to inspect the property or determine whether it's occupied by tenants, who may be hard to evict.
Sometimes "you have half an hour to make a half-million-dollar decision," says Damon Lines, an executive at PostedProperties.com, a Phoenix company that provides information to foreclosure investors and bids on their behalf. "That's something most people can't or aren't willing to do."
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In the states where home prices have fallen the most, many local real-estate markets are dominated by foreclosed property, dragging down the value of neighboring homes. Barclays Capital estimates that banks and mortgage investors have 639,000 foreclosed homes for sale across the U.S., largely concentrated in Florida, California, Arizona and Nevada. That's equivalent to more than 10% of expected U.S. home sales this year.
Flippers swoop in at public auctions of foreclosed homes, known as trustee or sheriff sales. In many states, the lender sets the minimum bid, and takes possession of the property only if no one bids more. In the past, the minimum generally was about equal to the mortgage balance due. But in today's market, in which the value of many homes has dropped far below the loan balance, lenders wouldn't attract investors if they set the minimum at that level.
So lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession.
Sean O'Toole, chief executive officer of ForeclosureRadar.com, a research firm, estimates that in November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami.
The advantage of such an outcome for the bank is that it gets money for the property right away, even if it isn't enough to cover the loan balance due. The bank doesn't need to make repairs to the home, cover the taxes and insurance, or pay real-estate agent commissions.
The risk for banks is that if they set the minimum bid too low, the home might end up selling for much less than they could reap if they took ownership of it and sold it themselves. But with 7.5 million U.S. households behind on their mortgage payments or in foreclosure, many lenders are overwhelmed. They're negotiating with distressed borrowers and figuring out how to sell the growing supply of foreclosed homes.
"The banks are so screwed up," says Mirmelli, the Phoenix investor, that they don't always have a clear idea of the value of the property they are foreclosing on.
To help them set the minimum bid, banks often consult with local real-estate agents and use software that estimates housing values. American Home Mortgage Servicing Inc., which collects payments and handles foreclosures on behalf of banks and loan investors, uses a formula designed to "achieve a fair value for the property and induce third-party bidders," says Christine Sullivan, a spokeswoman for the Coppell, Texas-based firm.
American Home starts with a broker's estimate and subtracts the expected costs of taking ownership of the house and selling it. The minimum bid is above the net proceeds American Homes believes it could get by acquiring and selling the property itself, she says.
Outside the Maricopa County court building in downtown Phoenix, trustees -- companies that are hired to handle foreclosure auctions -- offer as many as 600 or 700 houses every weekday. A typical auction lasts only a few minutes. On a recent afternoon, a few dozen bidders and onlookers were clustered around a trustee employee seated on a lawn chair conducting auctions. He kept track of the bids on a laptop computer perched on one knee.
Many of the bidders are regulars at the sale, bidding for themselves or on behalf of investor clients. "We're all kind of like a little dysfunctional family," says Steve Mutsaers, a representative of PostedProperties, who was wearing black sunglasses, a white polo shirt and gray plaid shorts. During the summer, Mutsaers says, he wears a sombrero to cope with temperatures well above 100 degrees.
People who attend trustee sales here and in other foreclosure hot spots around the nation say the auctions have recently been attracting more bidders. "Properties are getting bid up," says Hal Feinberg, a Phoenix property investor. "You can still get good deals, but you've got to be more patient than you were a year ago." He and other investors in the Phoenix area say they have been flipping a lot of the homes they buy to Canadians taking advantage of a weak U.S. dollar.
This is simply the best time in history to invest in a foreclosure.
