Finding a Measure of Foreclosure

Posted by Chicago Tribune

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Foreclosures are in vogue.

Yecch. What a thing to say.

But it’s true, in one sense: For every disappointed, aching homeowner in default on his mortgage, there seem to be plenty of folks thinking this is their moment to “get into foreclosures,” as they seem to be fond of phrasing it.

I know, because I hear from them all the time, e-mailing me for guidance on how to get started. For the record, I am unequivocally unable to give anybody any guidance. But I have had enough experience as a detached observer to know this much: Foreclosures seem to exist in some kind of parallel real estate universe filled with its own jargon, procedures and — this is important — risk.

Recently, I sat through what is known as a “sheriff’s auction” (though no sheriffs were involved) as dozens of foreclosed properties went up for bid. The experienced investors who filled the room took a pass on every single property offered because there wasn’t enough equity in any of them to make them worth buying. That is, their mortgages were greater than the value of the homes.

This so-called “upside-down” condition is the sad byproduct of the easy-lending era that seems to have played out so suddenly — homes bought with tiny down payments or no down payments or homeowners who have gotten carried away with their ability to use their home equity as a cash register — with the presumption that home values can only go up, up, up.

But there’s another variety of foreclosure auctions, and their growth is a sign of our times. Lenders, having gotten stuck with properties after nobody bid on them at the sheriffs’ sales, are hiring auction companies to sell literally hundreds of homes at a time. Though foreclosure sales have been around for a long time, they’re ballooning in size.

For example, in August the Texas-based auction firm Hudson & Marshall offered about 200 Chicago-area homes in a single sale, according to a company spokesman. She said the firm held a similar auction here last year, with only about 25 homes on the block.

“It’s like an avalanche,” said Crystal Wright, who represents the company. Her firm came into the Chicago auction on the heels of an auction of 200 homes in one sale in Southern California and 400 in Northern California, she said.

What these mega-auctions offer is title insurance and a chance to inspect the properties before the sale, neither of which go with the so-called sheriff’s sale properties.

“We’re starting to see more and more homes ending up being owned by lenders,” says Chicago auctioneer Rick Levin of Rick Levin & Associates. “The lender is looking for an efficient outlet to sell large quantities of these homes quickly.”

Levin points out that despite the popular perception that foreclosure auctions offer a chance to buy a home for pennies on the dollar, lenders aren’t giving these places away.

But they have to do something with these homes, he says. “Banks are in the business of lending money, not in the business of owning property,” he says.

“We’re in a cold climate, and owning vacant properties through the winter isn’t prudent.”

Plus, he says, more are undoubtedly in the pipeline: Housing industry analysts predict that 2008 will see a mother lode of foreclosures because of the sheer numbers of homes purchased in 2005 with adjustable-rate mortgages that are starting to adjust to uncomfortable heights.

So, he says, lenders are motivated, and there can be deals at these sales, though nothing is guaranteed. Typically, potential buyers at these auctions have to come armed with a cashier’s check for several thousand dollars, payable to themselves, that would serve as earnest money; there are numerous other requirements to insure that the bidder is sincere. The auctioneer will add a premium to each sale (in Levin’s case, 7.5 per-cent), which is something to keep in mind if you think you’ve stumbled on the deal of the century.

And, having said that I’m not in the guidance business, I’ll offer this pitch for prudence: Would-be buyers have to do their homework. If it looks too good to be true …

Hear Mary Umberger on WBBM Newsradio 780 at 6:21 p.m. and 10:22 p.m. each Thursday and Friday and 7:20 a.m. each Saturday and Sunday.

via Chicago Tribune
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