With this simple start, Denver’s weekly Tuesday morning auction of foreclosed homes got underway: “Good morning. I’ll start with the standard disclaimer. For any bankruptcy filings we may have been told about by 10 a.m. this morning, those properties will not be offered for sale today.”
One recent morning, eight people gathered in a conference room in the city’s Webb Municipal Office Building. One was Richard Dewar, a deputy public trustee of the Denver clerk and recorder, arriving promptly at 10 a.m. from his office across the hall.
“Today, we have about 50 properties,” Dewar told the group.
They represent the number of foreclosed homes that were newly available for purchase that week.
In the first five months of 2007, 3,560 Denver County property owners received notices that set the wheels of foreclosure in motion. The pace has quickened since 2006, when 5,162 such notices went out. That’s up from 2,500 in all of 2003 and fewer than 1,000 annually between 1994 and 2000.
Prospective buyers must arrive early at the auctions with cashier’s checks. On this morning in June, two properties draw bids. One is a three-bedroom, 1,580-square-foot home in the Hilltop neighborhood, which goes for $200,016 to a lone bidder.
The other is a two-bedroom, 799-square-foot home near City Park. Four people have brought in checks for $17,496.62, the opening bid. Then the auction begins.
“Twenty,” says a man at one end of the table, bidding $20,000.
“Twenty-one,” is someone’s quick response.
Someone else bids $22,000, followed by $25,000. The bid rises quickly, in $1,000 increments, to $31,000. Two of the four potential buyers drop out as the opening bidder and a woman continue through $40,000, $41,000, $45,000 and $46,000.
He wins the Cook Street home for $50,000, signs for it and receives a certificate of purchase. The entire process takes barely a minute.
If competing claims aren’t filed successfully by lien holders, and if the current owner doesn’t take legal steps to redeem it within 75 days and doesn’t strike a deal with an investor to pay off the defaulted loan and then buy the property, the successful bidder can follow through on his purchase. If the sale falls through, he will get his $50,000 back plus interest.
Risky business
Some investors expect nothing more than a return of their funds, said Wayne Dellinger, author of “The Secrets of Foreclosure Investing in Colorado” (Johnson Books, 2004).
“If they end up with the home, it’s a bonus,” said Dellinger. It’s also a tough way to make money, having so much capital tied up with so much uncertainty.
At an auction in mid-May, investor Vivi Narvaez of Denver bid successfully for one unit of a small duplex on South Eliot Street.
“I buy homes to fix them up and sell them,” she said. “It definitely involves risk.”
Her bid of $49,001 was just $1 more than a bid submitted weeks earlier by the foreclosing lender to take ownership. The property last changed hands for $155,000 in May 2006.
It would appear the buyer got a great bargain – a property with more than $100,000 in equity after accounting for the outstanding loan. That’s possible, but not necessarily so, said Dellinger,
“We don’t know if the unpaid mortgage was a first or a second,” he said.
Unwitting buyers sometimes get stuck with unexpected liabilities. In this case, presumably, the buyer did her homework.
A safer way to acquire foreclosed homes is to buy them from the bank after they fail to attract bids at auction. Most lender-owned homes eventually enter the multiple-listing service and are represented by real estate brokers.
Investor Ben Fetherston has bought about 40 foreclosed properties in the Denver area, he said. Most were multiple listings.
“I work with five or six agents who are always checking for me,” said Fetherston. Listings of lender- owned foreclosure properties come up “almost on a daily basis.”
“Buying a listed property gives you multiple lines of defense that you don’t get at an auction,” he said. A conventional purchase contract, for example, allows for an inspection.
Tuesdays at 10
In Denver, auctions are held nearly every Tuesday at 10 a.m. Properties to be sold that day are listed on the public trustee website at noon the previous day.
The tight scheduling allows little time to inspect a property or consider its value.
Professional investors start tracking auction candidates much earlier. Notices must be published in a newspaper for five consecutive weeks before the auction.
Conventional mortgage financing is nearly nonexistent, except for investors with track records of success.
A foreclosure investor may have a line of credit with a bank, according to Fetherston. But typically it’s secured by other assets.
Verifying a clear title free of liens and encumbrances is a major concern. Normally that’s the work of a title insurance company.
Anyone can do a quick search for liens on public computers in the Denver trustee’s office, but it won’t reveal potential problems such as an encroachment by a neighboring property.
A thorough search by a title company is possible on short notice, said Narvaez, but generally it requires a special relationship with that company.
“You have to do a lot of business with them,” she said.
Of the various ways to acquire foreclosed properties, many investors say, buying at an auction is the realm of experts.
“I would agree,” said Fetherston. “For me to consider it, I’d probably have to get the property at 50 cents on the dollar.”
HUD homes
The U.S. Department of Housing and Urban Development insures loans to roughly 1 million homebuyers annually.
By intention, a large percentage of those borrowers are first-time homeowners. When a borrower defaults, HUD takes ownership of the property and resells it to the public.
HUD homes are included in the multiple listing service, and they are viewable without charge at several sites, including, a paid subscription, says it provides more timely listings, plus extensive investment education.
Anyone may bid on HUD homes using an online form. Priority is given to buyers who promise to occupy the home. Nonoccupant investors may bid on homes after they remain unsold for 10 days.
Denver investor Gabe Seaman and a business partner bought a HUD property in February. The five-bedroom, two-bath, bilevel home at 120 South Eliot St. was purchased for $100,069. Their bid covered about $4,000 in closing costs and a $4,000 commission paid to Seaman’s partner, who is a real estate agent.
“The house was in very rough shape,” Seaman said.
They made $14,000 in improvements, with new flooring, carpeting, drywall, and interior and exterior paint. Both bathrooms were renovated, and new kitchen appliances and cabinets were installed. The property is now on the market for $179,900.
HUD homes represent a value of “maybe 70 cents on the dollar,” said Seaman.
That’s relative to prices paid by previous owners in what was perhaps an inflated real estate market. The now-stagnant market shows no signs of improving, he said, but good opportunities can be found by diligent investors.
Not all home investors are professionals.
“I’m just trying to find a home, a nice condo at a decent price,” said Jana Stover, attending a Denver auction with longtime friend Anna Shaw.
“I’ve been looking at houses, and everything in Denver is $300,000 to $400,000,” Shaw said. “Maybe I’ll find a deal here.”
