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Friday, March 28, 2008

Weekend Reading: How to buy a foreclosed home on the courthouse steps

(Ed: We know a journalist who’s decided that the mortgage meltdown represents a great opportunity to get into real estate—in Northern California. He thinks it’s such a great opportunity, in fact, that he quit his day job to get into this. He agreed to file occasional posts charting his progress.)

I’ve been spending a lot of time on PropertyShark trying to find a deal on any decent house that was in foreclosure. Propertyshark not only tells you what’s been foreclosed, it tells you when and where the house is being auctioned. Recently, I saw something that looked interesting—a house in Piedmont was being foreclosed for $420 grand.

I drove by to take a look at the house. It was in the flats of Piedmont, at the bottom of the hill—the less nice part of town. Still, because the school district is so great here, everything is expensive. Any lot alone would be well worth $420,000.

The house was a small, blue stucco home; the shrubs around it were overgrown, so it was hard to really see what was going on. You’re not allowed to go in—all you can do is drive by. This house was definitely still occupied. You could see though the shrubs that a dog was sitting in the front window. I thought about whether I could buy the house, then rent it back to the tenants. Maybe a lease-to-buy option.

On the appointed day, I went to the courthouse in Alameda. Houses are auctioned off there, literally on the front steps, every day at noon, and again at 12:30 p.m. The only difference between the auctions, except for the auctioneers, was different groups of homes were being sold off.

The buyers remained the same. I've since returned a few times and can say that every day, a crowd of regulars—a dozen people or so—assembles. Most of them are pros, know each other and are friendly even though they bid against each other. Most of them also wear Bluetooth headsets in their ears so they can talk to investors during the bidding.

One curious thing, from a sociological perspective: the bidding usually ends up with some Asian guys on one side bidding against everyone else. The “everyone else,” in this case, is an ethnically diverse group of people—white guys, an African American woman, a few Latinos and some dudes from the Middle East. But when a particular home is hotly contested, invariably the Asian guys bet against the rest. I asked one of the regulars why this was and he shrugged. “We all know each other. That’s pretty much the way it works.”

He said most of the people that gather here are pros who buy the homes, evict the people who live there—the bank basically assigns that ugly task to the new buyer—fix them up and flip them. Sometimes they rent them out.

When the bidding starts, it’s actually very tedious. The auctioneer has to read off a bunch of legal mumbo jumbo very fast; that alone takes an endless minute. Then he starts the bidding process. The floor—where the bidding starts—is always the mortgage amount owed to the bank.

The vast majority of the homes didn’t sell, which surprised me. Every now and then someone would bid on one, and the Asian guys would jump in, and there would be a little excitement. But most of the homes didn’t sell. The house was no longer worth the amount owed to the bank. What the pros are hunting is diamonds in the rough.

That, apparently, described the Piedmont house: As soon as the auctioneer put it on the block, a bunch of people started bidding. It quickly got to $600,000, when I and just about everyone else, dropped out. A white guy and an Asian guy hung tough. Now the pace slowed to a miserable, endless crawl, as the bids moved in thousand-dollar increments. Every time it got to “Going once! Going twice!...” the other guy would add a thousand. Then the action would pause as information was relayed into Blueteeth. It took 20 minutes or so to get to the final bid—the Asian guy got it for just over $620,000.

The pros know what they’re doing and tend to be pretty conservative.

One interesting thing was how you pay for one of these houses. The bank will only take cash—as if anyone would carry that much around—or cashier’s checks. Cashier’s checks have to be made out to precisely the right amount. But since you never know what you’ll be paying until you clinch the bid, how does that work? Easy: The pros carry wads of cashier’s checks, made out in a variety of denominations—a $400,000 one, say, and a couple of $100,000s, $50,000s, $10,000s and $1,000s. There’s maybe 10 checks in a roll—probably close to $1 million in different denominations.

(Virtually everyone I told this story to has suggested that the courthouse steps at noon would be a great place to stage an armed robbery. That either tells you something about my friends, or their intelligence. You wouldn’t get very far with those stolen cashier’s checks.)

It turned out that on my first outing to Alameda, there was another non-pro on the courthouse steps, looking for a deal. He had his eye on a place in Dublin, which has a bunch of nice, new homes on the market that are going into default. In better times, they tend to sell for $1 million to $1.1 million new. So this guy bought one of them for the floor price: $970,000. No one else bid.

Happily, he produced a cashier’s check for that amount, and was handing it over, when everyone realized he had made a newbie mistake: The purchase price must exceed the floor price. He looked chagrined, until one of the pros reached into his pocket and flipped him a penny. That satisfied the bank, and he got the house.

After he left, the pros said, the Dublin buyer got hosed.