Drop Bids at Trustee Sales

Drop Bids at Trustee Sales

The Arizona Republic recently ran an article discussing the practice of "drop bids" at the Maricopa County foreclosure auction. When a lender posts a Notice of Sale amount (often referred to as the minimum bid) and then drops the amount hours or even minutes before the opening of the auction, this process is known as a drop bid and is considered illegal in Arizona. Ideally, lenders are encouraged to post the Notice of Sale amounts for foreclosure properties that will be sold at the trustee sale at least 24 hours prior to the start of the sale.

According to the article, up until recently, the majority of homes brought to auction through the trustee sale were failing to sell and were reverting back to the banks. These properties would then re-enter the market as REOs. This all changed last month as a record 1,000 properties sold through the public foreclosure auction process. This was five times the number that sold in January. According to the Republic, "Real estate market watchers and unsuccessful bidders at the auctions say drop bids are driving the record number of auction sales."

No one seems to be sure why banks would choose to lower the minimum bid without adequate notice. Those who are up in arms over the practice tend to imply that the reasons are malicious, but there are other possibilities. Kelly Braaksma, a trustee sale expert and CEO of FAST (Foreclosure Auction Service Team) a company that specializes in helping investors to purchase properties at auction, says that the uncertainties surrounding properties coming to auction may have more to do with last minute price changes than anything else. "Lenders are inundated with foreclosure properties," Braaksma says, "of the hundreds or thousands of properties slated to be auctioned off at any particular trustee sale, only a few dozen may actually make it up to bid. The rest are postponed, canceled, reinstated, etc. All the aspects of the sale, including starting bid price, are constantly in flux right up until the last minute."

Whatever the reason, the Arizona Republic continues by saying, "Drop-bid purchases enable the few who know about the deals to buy homes and quickly resell them for hefty profits...Buyers aware of the "drop bids" scoop up the houses before other bidders know about the price drops."

Mr. Braaksma has developed a system that analyzes historical opening bids from various lenders, along with a myriad of other data and generates algorithms that predict which properties are most likely to actually make it to auction and which will most likely have opening bids that make them worthwhile to investors. I have formed an alliance with FAST in order to provide this service to my clients looking to purchase at the trustee sale. I don't charge more for the service, clients pay only my standard commission at the close of a sale. But for this commission, they are provided not only with all of the reports and data that FAST generates, but also with a representative that will be present at every Trustee auction, available to purchase these choice properties and take advantage of last minute drop bids.

If you are interested in using trustee sales / foreclosure auctions to acquire property, please contact me and I will send you a packet with more information on the process:
Glenn Plantone (702) 769-9872

Click here to read the full Arizona Republic article

Mind the Gap

Mind the Gap

You know you've arrived in London when you step out of the "tube" and hear the oft-looped pleasantry over the loud speakers, "Mind the Gap!" The announcement is referring to the gap between the subway platform and the train. In the current Las Vegas real estate market, we must mind a gap of a different sort. Let me explain.

As a full-time real estate investor and investor agent (of my 80 sales so far this year, only 3 were to owner occupants) I am used to observing market trends first hand in my hometown of Las Vegas. As our market began to reach bottom 6-8 months ago, investor money from all over the country and internationally began flooding back into the valley looking to snatch up bargain priced Las Vegas real estate. For months, it was relatively easy for me to find great REO / bank-owned deals for my visiting investor clients. 85% of my clients were (and are) all cash buyers and I entertain an average of 4-6 investors each weekend. Las Vegas was (and continues to be) the foreclosure capital of the world, and for months REOs were in great supply.

But over the last several months, things have steadily begun to shift. I have had to work harder and harder to find good deals for my clients. I have repeatedly found myself in multiple bid situations and the competition for REO / bank-owned foreclosure properties has begun to drive up prices. September saw the first increase in median home price in Las Vegas in over two years. More and more investors are fighting for the properties that are available and potential owner occupants are becoming increasingly frustrated as banks accept one of the multitude of "sure thing" cash offers that seem to be present at every REO listing.

The reason for this feeding frenzy is simple: Demand is far exceeding supply. In the month of September 2009, nearly 3500 single family homes sold in Las Vegas. By contrast, only around 1800 homes went back to the banks through the foreclosure process. This creates a large "gap" between supply and demand. At first glance, one would think that this gap represents good news for primary residents struggling to sell properties through the "normal" sales process. For the last two years, it has been virtually impossible for normal listings to sell in Las Vegas as they had to compete with the overwhelming numbers of foreclosure properties that were making the market. So now that the supply of foreclosure homes is beginning to slow and the demand for properties is increasing, we should begin to see more homes selling through traditional listings right? Maybe not.

In order to understand this phenomenon, we need to be mindful of another "gap." The gap between the prices of bank-owned foreclosure properties and the prices at which owners can afford to list their homes. Prices have dropped so sharply in the Las Vegas valley over the last three years, that many properties have lost 70% of their value. Homes that were selling for $300,000 in 2004, are coming back on the market as foreclosures now for $110,000. This means that anyone who purchased property in Las Vegas in the last 10 years is probably upside down on their home. Those who purchased 3-5 years ago are drastically upside down.

This gap means that even as demand for property in Las Vegas increases, and supplies of bargain-priced foreclosure / REOs decrease, we are still likely not to see many traditional listings and closings for quite some time. The gap between what is owed on the homes and what the market will pay is just too great. The exception to this might just be the short sale, which is making a comeback as I addressed in my two previous articles.

Short Sales vs. REOs

As of September 2009, the nation's supply of REO homes has begun to shrink, even in foreclosure capital Las Vegas, NV. As investors flood back into distressed markets, we are seeing multiple bid situations for most REO or bank-owned foreclosure properties coming back onto the market. With demand exceeding supply, it is becoming harder and harder for investors to purchase REO properties at discount prices. Also, with the Obama administration offering hefty incentives for banks to help homeowners avoid foreclosures, REOs are becoming more scarce. Instead, we are seeing short sales skyrocket in popularity as banks have suddenly become willing to negotiate this option.

Many of my investor clients have asked me to explain the differences between short sales and foreclosures/REOs. First, the definition of each: A short sale occurs when a buyer negotiates with the bank to purchase a home from the seller for less than what the seller owes on the mortgage. In many cases, where the equity in the property has dropped sharply, this means that the second lien holder (if any) receives next to nothing on their note (think $1000 for a $90,000 note as an example) and the first position lender very often must still except less than the amount of the first mortgage. REOs are bank owned properties that have already completed the foreclosures process. The owner of the property, upon failing to make their mortgage payments, has been notified of their delinquency, received a notice of default and then a notice of sale. Subsequently the property has been sent to auction at the trustee sale where, in absence of a successful winning bid, it has reverted back to the bank holding the mortgage. These properties are then re-listed by the banks on the open market as REOs or Real Estate Owned meaning bank owned real estate.

The major differences between the two transactions can be summed up in two categories: Differences to the Buyer and Differences to the Seller.

Differences to the Buyer

Difficulty of Transaction - Short sales are traditionally much more difficult to transact than purchasing an REO. Once a bank has taken possession of a foreclosed property and re-listed it as an REO, that REO property can then have offers placed upon it and the bank will respond to those offers just like any other seller. Short sales must go through a special evaluation and approval process at the bank. This process usually involves not only evaluating the fair market value of the property, but also evaluating the potential of the current owners to continue making their payments. Sometimes, a bank will offer to modify the existing loan if the sellers wish to stay in their property rather than negotiate the short sale. This can result in the property being pulled from the market altogether.

Time Frame for Closing - REOs can often close in a 30 day escrow just like a normal transaction. Short sales can take months to negotiate and then might not be approved at all.

Price - Because the buyer is usually not competing against other offers in a short sale situation, they can often obtain the property for less than what the same property might end up costing as an REO.

Differences to the Seller

Future Home Purchases - Homeowners who go through a foreclosure cannot apply for an FHA loan for 5 years after the date of foreclosure (7 years for investors), but homeowners who complete a short sale can apply for an FHA loan 2 years later. When homeowners apply for a loan through a mortgage company, they must state on the application if they have had a property foreclosed upon or given a deed in lieu of foreclosure within the last 7 years. There are currently no questions on standard mortgage applications asking whether or not a homeowner has ever completed a short sale.

Credit Score - A foreclosure will typically lower a homeowner's credit score by somewhere between 250-300 points and this decrease will last approximately 3 years. Short sales can often affect an owner's credit by only 50 points and that decrease may sometimes be remedied in as little as 12-18 months.

As the supply of REO properties continues to be tight across the country, short sales are presenting a good buying opportunity for would-be investors looking to re-enter the market. They can also provide a win-win situation for home owners looking to escape a negative equity position with less of a hit to their future purchasing potential and credit score.