Boston Real Estate Blog
House Flipping Makes a Comeback
by James R. Hagerty
Wednesday, December 9, 2009
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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 in the morning of Sept. 28 that a never–occupied custom house on the northern fringes of this Phoenix suburb 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.
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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, Mr. 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.
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.
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 firm 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 many home values have 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 oth ers 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 some 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 Mr. 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, Mr. 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.
Buying at these auctions is perilous. There are no public viewings, so bidders often can’t know how much damage may have been done inside a house by occupants facing foreclosure. “We’ve seen everything,” says Doug Hopkins, chief executive of PostedProperties. “We’ve seen people pour concrete down the toilets.” Unless they’ve done their homework, bidders also don’t always know whether they’re buying a home subject to a lien from another lender, which can happen in cases where the borrower took out more than one home loan.
Because of such complexities, many of the bidders are people with experience in the property business. Jon Goodman, a real–estate lawyer in Boulder, Colo., for example, has bought 19 properties so far this year with other investors and sold 11 of them.
In February, the group won an auction for a home in Commerce City, Colo., near Denver, by bidding $142,000. Only afterwards did they discover that the previous owners had stripped the house of a toilet, much of the carpeting and a kitchen range. They replaced the missing items and made other minor improvements, eventually selling the house in May for $209,000. (The loan balance on the house had been $265,663.)
Mr. Goodman says their expenses came to about $24,000, including about $8,000 for real–estate commissions. That left a pretax profit of about $43,000.
The foreclosure auction was handled by American Home Mortgage Servicing. Ms. Sullivan, the spokeswoman for American Home, says the firm believes it didn’t underprice the home and it received “a fair, market–value price for the property.”
In Miami, a group of investors led by Oded M. Kaiser recently bought a condo at auction for $170,000. Two weeks later, they flipped it for $330,000. The loan balance was about $466,000. A spokeswoman for Litton Loan Servicing, which handled the sale on behalf of mortgage investors, declined to comment.
Not all flippers come out on top. Mr. Goodman says one of his legal clients, bidding on his own, unwittingly bought a house that was still subject to a first–lien mortgage. To gain control of the property, the client had to pay off the first mortgage. As a result, says Mr. Goodman, the client, who declined to be named, is likely to have at least a small loss on the deal.
Last summer, Phoenix investor Greg Thielen bought a home at an auction and later found that the former owner had stripped out air–conditioning units, granite countertops and kitchen cabinets, and uprooted palm trees from the lawn. Repair costs came to about $30,000, leaving Mr. Thielen with a small loss on the purchase. “It’s not as easy as people think,” says Mr. Thielen.
The Scottsdale property bought by Mr. Mirmelli was supposed to be the dream home for Brad and Michelle McCaughey and their three children. Mr. McCaughey, who grew up in Ann Arbor, Mich., was a minor–league hockey player and coach after graduating from the University of Michigan. About nine years ago, having moved to Phoenix, he says he discovered “a passion for real estate.” He became a real–estate agent and began investing with his father and brothers–in–law in rental properties. Soon they had a dozen homes.
In 2005, Mr. McCaughey and his wife paid about $500,000 for three acres of desert land and began building a home. By the time the house was nearing completion in 2008, the family rental–property business was in trouble because financing and other costs were exceeding their income.
The McCaugheys started selling their rental properties and put their own house on the market. They hoped to avert a foreclosure by getting Citigroup to accept a short sale, in which a home is sold for less than the loan balance due. Before they could find a buyer, though, Citigroup foreclosed on the home, and it went up for auction at the Maricopa County Courthouse this past September.
Citigroup initially set the minimum bid at auction at $1.3 million, far more than the market value, given comparable sales in the neighborhood. Then, on the morning of the sale, Citigroup lowered that minimum to $379,900. PostedProperties, which monitors Web sites for such price changes, sent out an email on the opportunity to Mr. Mirmelli.
Mr. Mirmelli has his iPhone set up so he can call up the address of a home due to be auctioned, see a map of the neighborhood with a tap of his finger and then see panoramic photos of the street with another tap. While he researched the home, one of his partners drove out to see the exterior and make sure there were no occupants. A PostedProperties employee bid on their behalf and won the house for $486,300, a sum that then went through the trustee to Citigroup.
After expenses of about $54,000, including real–estate commissions and minor repairs, Mr. Mirmelli and his partners expect a profit of about $150,000 on the flip. “It turned out to be a very good return,” he says.
A spokesman for Citigroup declined to comment on the transaction.
The McCaugheys, who formerly owned the house, are now renting a smaller home. Mr. McCaughey now works for a telecommunications service and is thinking about going back into hockey–related work.
Over a bowl of soup at a Paradise Bakery & Café in Glendale, a suburb of Phoenix, Mr. McCaughey says he sees a lot of real–estate bargains now and may jump back into the market at some point. As for the losses he’s taken on his former holdings, he says: “It is what it is. You deal with it.”
Write to James R. Hagerty at bob.hagerty@wsj.com
Bay State Homeowners Can Now Sell Back Electricity
Bay State Homeowners Can Now Sell Back Electricity
Associated PressToday
Homeowners tired of paying high electricity bills can now turn the tables by selling excess electricity back to power companies.
The only hitch? Homeowners need a way to generate power on their own, either by installing solar panels on their roofs or planting wind turbines on their property.
It’s called “net metering,” and beginning today property owners can submit the applications needed to begin earning credits on their electricity bills if they generate more energy than they need.
To sweeten the deal, the Massachusetts’ 2008 Green Communities Act requires utility companies compensate their customers for the excess electricity at a retail rate rather than a lower wholesale rate.
The law also lets customers allocate their credits to other customers. (AP)
The New GFE Will Help Borrowers
On January 1, 2010, a redesigned Good Faith Estimate (GFE) will become effective, and it will make mortgage shopping a little easier.
The GFE is a disclosure of information about a mortgage transaction that lenders must provide within three business days of receiving an application. The existing GFE, which has been around for as long as I can remember, is really bad, setting the bar for improvement extremely low. The new GFE clears the bar by a comfortable margin, though it is far from perfect.
Clearer Presentation of Critical Mortgage Features: The existing GFE and its companion Truth in Lending (TIL) disclosure are so poorly designed that borrowers who are distracted and feel under pressure when they are exposed to disclosure documents often miss what may be critically important to them. This could be that the interest rate on their loan can increase, that the balance can increase, that their loan has a balloon payment, or that it has a prepayment penalty. With the new GFE, it will be very difficult for a borrower to miss these features because they are prominently displayed on page 1 in a nice summary table.
Clearer Presentation of Lender Charges: The existing GFE provides an open-ended listing of all settlement charges, without distinguishing charges of the lender and those of third parties. The format encourages lenders to invent new charges, and since all the figures are “estimates” subject to change, to escalate charges as loans move to closing. The format encourages borrowers to question individual lender charges — what they mean and whether they are fairly priced — while neglecting the only number that matters, which is the total of all such charges. The current GFE does not even show total lender charges.
The new GFE makes a clear distinction between lender charges and third-party charges, and lender charges are no longer itemized. Lender charges consist of just two items: Points that are paid to reduce the interest rate and the total of all other charges, referred to as the origination charge. The origination charge cannot change at closing. The sum of the points and origination charge are the adjusted origination charges.
Clearer Presentation of Broker Charges: On brokered loans, the origination charge includes any fee paid the broker by the lender, called the “yield spread premium”, or YSP. The YSP is also shown as an upfront credit to the borrower (negative points) granted in exchange for a higher rate. This allows the borrower to see how much of the origination charge is being paid indirectly through a higher rate.
Brokers don’t like this method of disclosure, but in my opinion it clarifies an inherently confusing process. Not all borrowers are going to “get it”, but even if they don’t understand how the figures are derived, the bottom line figure for adjusted origination charges, together with the rate, provides an unbiased price comparison between direct and brokered loans.
Little Improvement in Clarifying the Lender’s Price Commitment: While the new GFE does freeze the origination charge, it does not commit the lender to the rate and points shown on the GFE. The new GFE is little better than the old one in helping borrowers understand how and when the lender is committed.
The rate and points on the GFE are not final until they are locked by the lender. The new GFE tries to convey this to the borrower by having the lender disclose on the GFE how long the rate and points in the GFE are good. If the loan has been locked when the borrower receives the GFE, the GFE will show the lock period, usually 30 to 60 days.
But if the loan is not locked when the borrower receives the GFE, and if the GFE has been sent by overnight or slower mail, the terms in the GFE have lapsed when the borrower receives it because mortgage prices are reset every day. It is not clear how the lender will answer the question of how long the rate and points in the GFE are good if they have already expired.
It is possible that lenders will try to avoid this problem by delivering the GFE on the day the terms in the GFE are set. In such an event, the GFE could read that the terms are good until the end of the same day. This would require an online or other method of rapid communication.
Lenders may be encouraged to lock loans as soon as possible by recent changes in TIL regulations. If the APR at closing is more than .125% higher than the APR in the disclosure documents, the new regulations require lenders to issue a new set of documents.
Realty Direct In The News!
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