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Foreclosure auctions still don't bring the deals expected

Investor Tony Barquin shifted amid the crowd in the stuffy auction room at the Miami-Dade County Clerk's office Thursday, pondering which among scores of homes in foreclosure he might bid to buy.

As more and more homeowners can't pay their mortgages, the number of properties hitting the auction block has skyrocketed. So Barquin's business should be booming. But Barquin said fewer are worth buying. He left the auction empty-handed.

"Everything is upside down here," he complained, describing homes worth less than the debt on them. "In a month, there might be only a few really good deals."

The result: Lenders reluctant to take deep losses are taking properties back in greater numbers in hopes of selling them later for more money.

The amount of foreclosed real estate owned by Florida-based banks and thrifts has nearly tripled since the fall of last year, when foreclosure rates began their upward trek -- to $94 million as of March 31, from $34 million Sept. 30, according to the most recent Federal Deposit Insurance Corp. data. (These data do not include giants like Bank of America, which have large operations here but are based elsewhere.)

The Florida numbers are much worse than the national average, Miami banking analyst Ken Thomas said. Total real estate owned by banks and thrifts rose 37 percent in the first quarter, compared to 12 percent nationally, he said.

"It appears things will likely get worse before they get better," Thomas said.

At Thursday's auction, of roughly 70 properties offered for sale, investors bought only two. A handful were scratched. The rest were bought back by lawyers for various lenders.

Even seemingly great deals were snubbed. Example: a two-bedroom condo on Claughton Island Drive in Miami bought last June for $690,000. The outstanding balance on the loan was $588,062, but the lender was willing to let the property go for $373,900.

"Sold to the plaintiff!" the bespectacled clerk intoned, as the home (and others like it) failed to elicit bids from the crowd of about 70.

In foreclosures, the biweekly courthouse auction is the last step in legal proceedings in which a lender moves to recover the money it loaned or take title to the home, after a borrower has defaulted on their mortgage.

In Miami-Dade County, bidding starts at $100, but lenders usually set a minimum price equal to or less than the amount owed.

When investors' bids fall short of that price, the home reverts to the lender, who usually employs a real estate agent to list it on the market.

Investor Maher Ghafir, who has been attending the auction for nine years, said lenders are stubbornly asking for nearly the full amount of outstanding loan balances, only to get title to the property and list it at steep discounts on the MLS.

"It doesn't make any business sense," Ghafir argued, since selling a home takes months, depends on buyers getting financing and requires lenders to pay commissions to agents.

Lenders that take back properties are holding out for a rebound, said John Mechem, a spokesman for the Mortgage Bankers Association.

"It's a clear trade off between the carrying cost, the interest expenses, insurance, taxes and maintenance versus the expected appreciation of the property," Mechem said.

Typically, lenders view the auction process as a fast, cheap way to get cash out of their mortgage collateral.

Sales are done in a day: Winning bidders immediately put down a deposit of 5 percent of the sale price, which is nonrefundable. By 3 p.m. the same day, the balance is due. Payments are by cash or cashier's check.

Stuart Gitlitz, a Miami lawyer who represents lenders in foreclosure proceedings, said few people have that kind of cash on hand, so it's normal for lenders to take back most homes.

"What is happening now is not the aberration," Gitlitz said. "What happened in the last couple years was the aberration," he said.

During the boom years, Gitlitz said, lenders could recover the full amount of bad loans at auctions from buyers, who could still turn around and sell the properties for a profit.

"What is happening is that values are not there and investors are being more cautious," he said.

Foreclosure investors' business depends on their ability to rehab and sell homes quickly, so they can't hold out for a market rebound. That's perhaps why even some deeply discounted properties for sale Thursday did not garner bids.

One Miami Beach condo was slashed by nearly $400,000.

"Even at that price nobody was interested," said Barquin, "because that's not what it's worth on the market."

Investors say they must buy at especially low prices to offset the risks that come with buying property sight unseen.

"If the debt with the bank is $400,000, but I know I'm going to have a hard time selling that for $325,000, I'm going to want to pay around $225,000 for it," said Julian Dominguez, president of Miami-based Foreclosure Information Systems, which publishes a weekly foreclosure report.

"What you pay at the sale is not the end of the road. You are going to have to make repairs and bring it up to a sellable condition," Dominguez said.

Dominguez agreed that more properties were going back to lenders, but that didn't mean good deals couldn't be found.

"That's why these guys show up here every week," he said.

Indeed, Barquin said 10 days ago he bought a condo in Southwest Miami-Dade for $210,000. He thinks it's worth about $250,000 on the market.

"I don't know the condition," Barquin said.

Miami Herald - 2007/07/08

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