By Steve Titus
While much of the country cringed as property values augured into lows not seen in 20 years, Colorado suffered a kinder, gentler housing recession, and by some accounts we are on our way out of the hole. The number of foreclosures passing through the public trustees’ offices is down in nearly every county, and in more affluent areas like Boulder, the glut of property distressed by the housing collapse has passed.
Not every area in the state is so lucky. Montbello, for example, is still trying to pass its gallstone of foreclosures, and those familiar with the market say that probably will take several more years. While all of this healing was – and still is – painful for many people, the result is a dramatic change in the wholesale property market and how investors and builders do business compared with three or four years ago. Overall, the market is poised
for a much healthier and realistic period of growth, but some investors and lenders think plenty of healing remains.
Playing the game
It’s a big day at the Denver foreclosure auction. There are already 200 people in the room, and more keep filing in. Before it starts, about 300 investors, hopeful home-owners and curious spectators will pack the public trustee’s meeting room in the Wellington E. Webb Building. Fewer than 15 will bid on the available properties, but the interest in this market segment is huge. These sales require buyers to pay with cash at the end of the sale, and the list of homes offered is published less than 48 hours before the auction. With so little time for research, only those with a firm grip on the housing market and the cost of rehabbing these mostly ruined buildings have the nerve to raise their hand in this game.
"We have the regular players that we’ve seen for the last four years," said Sindee Wagner, chief deputy public trustee. "I get ‘onesy’ ‘twosy’ new guys, but we have the standard guys who we know really well."
The regular characters are there, most huddled along the back wall where they can see the entire room. One longtime investor shows up late, red-faced and looking a bit like a thermometer about to blow, but his minions have reserved a seat in back for him, and they get up to offer him their chair.
The scene is a lot like a high school classroom. The upper classmen are cutting up in the back, stroking their egos with stories of their latest profitable deals, while the good kids and greenies sit quietly waiting for the teacher. The aides – bulldogs as they’re called by Wagner – warn the assembled crowd that "Sindee is on her way and she will want everyone to hush" when she arrives. On cue she makes her entrance and commands the room to quiet down. A fireplug with thinning, dyed-red hair, she commences with a round of condescending banter and anecdotes about the last time nearly a year ago that so many showed up for the foreclosure auction. She obviously enjoys wielding power over a room full of big egos with wads of cash to spend. She chastises the regulars for clogging up the long registration line with incomplete or missing paperwork: "C’mon, you guys know better than that."
They chuckle; it’s all just part of the show. She launches into an explanation of how the bidding process works, and given the large crowd of newcomers the speech is welcome. The sales process is organized and anticlimatic, and in 35 minutes Wagner will dispose of five properties worth about $795,000, taken by foreclosure from homeowners who stopped making payments for reasons that don’t really matter anymore. Another 26 houses worth about $4 million go unsold and are returned to the bank, often sitting empty for many months and declining in value before eventually returning to the open market.
This real estate reset button gets pushed every week in Denver and every other county in the state, with 3,400 properties auctioned annually in Denver alone and more than five times that statewide. While it seems like a big number, 2011 saw a 35 percent drop from 2009 and 2010 when about 5,400 properties in Denver County came under the gavel each year. The effect of foreclosures and changes in lending rules on the real estate market have been dramatic. Turn back the clock to 2007 and 2008, and investors were purchasing everything they could get their hands on.
"Back then death, divorce and occupational issues were typically the things you would see causing a foreclosure; there was still a lot of equity left in the properties," said Gary Clark, owner of Denver Investment Group and a specialist in acquiring distressed properties. "What you see now is banks taking huge haircuts because everything is so overencumbered."
The English translation is that foreclosed properties these days are worth far less than what banks have into them so they must heavily discount them at the auction, often by more than half. In addition, other lien holders who used the property as collateral are walking away from their debt because the sales almost never produce enough income to cover even the first mortgage.
Clark has been in this business, digging ditches, as he euphemistically calls it, for 17 years and has an encyclopedic knowledge of the laws surrounding the foreclosure process.
"I think part of the problem was the image of the American dream. Everyone wants to own their own home, and banks were loaning to anyone who could fog a mirror," Clark said. "Now you can see the huge disparity in lending practices. Back when we bought our first properties, you had to really qualify. Now it’s more difficult for all parties to come out whole, and there’s a glut of properties, and when they go back to the bank they become a blight on the neighborhood."
As lending practices eased in the mid- 1990s, more and more people were able to qualify for a home – or multiple homes. The market was flying high, and investors were buying properties sight unseen and using the equity in the property they purchased (usually only 15 percent or less) to secure loans for remodeling or to scrape and rebuild something totally new. Lending practices at the time allowed relatively small investors to work on several properties at a time, and the hot market made it relatively easy to resell most anything. This seemingly easy scenario attracted amateurs, and before long, ham-handed remodels priced too high started to fill the market. Then, in late 2009, disaster ensued, and the inexperienced or foolish were shelled from the market with many of the homes purchased at auction looted by their owners of everything from appliances to light bulbs and returned to foreclosure in worse shape than when they were purchased the first time.
"Now even people who can afford to stay are walking away from underwater mortgages because it doesn’t make good business sense," Clark said. "The people who are walking had the value of their properties diminished by the surrounding homes. If there are 10 (foreclosed) homes on my block, and the bank moves them by dropping the price 40 percent, my house is going to drop, too."
In most cases, money to purchase these abandoned homes is tough to come by and tougher to sell to someone who can qualify. The average buyer walks through the door, sees what looks like a war zone from the previous owner looting everything of value and can’t see past the mess to what could be and decides renting is the way to go for now.
"Now banks are only looking at huge FICA scores. They’re looking for reasons to not make the loan," said Ken Lawrence, an accountant and private lender. "On the traditional lending side, their underwriting is so squeezed that very few people qualify for a loan. Even if they found a way to make the loan, their appraisers are using the lowest priced comparable property at liquidated valuations for comps. For a property that might sell for $150K, the comps are coming in at $100K."
Lawrence lends almost exclusively to investors and looks at the value of properties after they are remodeled to calculate the loan-to-value ratio, which is usually about 75 percent. However, unlike a bank, rates with him are not at all-time lows; he usually claims 16 percent interest, and he will not loan the money needed to complete the rehab work.
Despite all of this, there is still tremendous interest in purchasing foreclosed properties. Prospective buyers see the historically low prices and demand for rentals and are shifting funds out of traditional investment portfolios to these more hands-on investments. Clark has seen groups of people pooling money into investment clubs and assembling rental portfolios against the day the housing market roars back to life.
"There’s such pent-up optimism, people want to believe things will get back to where they were," Clark said. "It’s like a race car, and people are revving their motors waiting to go. People want to get in and play in that market. I talked to a guy down there (at the Denver public trustee’s office) doing research, and he said he wanted to get involved in the foreclosure business. I just thought to myself, ‘Oh my God, he’s a deer in the headlights.’"
It may be a long time before the housing market does any roaring. Clark believes that banks are still holding large inventories of foreclosures and slowly releasing them onto the market in an effort to maintain values. Still, some of the most depressed areas around Denver are flooded with repossessed homes. Areas like Montbello have seen hundreds of sales in the past 12 months, but the vast majority are bank-owned properties that sold for 35 percent to 50 percent less than when they were purchased five or six years ago. Lawrence said it might be 15 years or more before the market really returns and may lag inflation for the next decade, which means any increase in value will come from investors’ hard work remodeling and restoring the state’s inventory of distressed property.