Realty Check

Over the last few years, as foreclosures have surged, the bulk of those properties have been going straight back to the lender. In California, where foreclosure totals are highest in the nation, over 90 percent end up as bank-owned, or REO, properties.

Just as a primer, after a property goes into default and the bank decides to foreclose, the home is sold off by the county in which it is located. The auction generally takes place at the county courthouse or at a third-party location with which the county has contracted. The bank puts in its opening bid, which is usually higher than most individual investors want to pay. Most properties, therefore, go back to the bank.

But an interesting new trend is showing up. Banks are apparently lowering their opening bid prices, and investors are clamoring to suck it all up. I checked in with the Field Check Group, a.k.a. mortgage guru Mark Hanson, who works along with ForeclosureRadar.com to get the most up-to-date stats on what’s going on with banks and all their distressed properties.

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He reports that in April 1627 foreclosures sold to third parties at California courthouses, which is a record high. The reason is that banks are now offering much lower starting bids. The properties are selling to third parties at far deeper discounts. “Another reason for a portion of the jump may be due the foreclosure moratoriums and the lack of foreclosure-related product available outside the courthouse foreclosures,” adds Hanson. “Because of this, investors were forced to focus more on the courthouse as a place for supply.”

One of the biggest roadblocks for investors has been the fact that lenders don’t give the opening bid for the properties often until the morning of the foreclosure auction. That makes it tough for investors to do any legwork on the property beforehand. “More times than not the price will be too high to make for a good investment,” says Hanson.

Investor John Helmick, of Gorilla Capital, says that in some counties in Oregon, where he works, “banks have begun to be more aggressive about dropping the opening bid, and in those counties you can see that the number and percentage that are sold to the bank has gone down.”

Buying at the courthouse is one of your more dicey investments, as potential bidders can’t always eyeball the properties and can’t be sure there aren’t back taxes or additional liens on them either. But it appears more and more investors are getting in the game.

As banks continue to be inundated with properties they can’t sell, perhaps these lower opening bids are a sign of good things to come, like perhaps more transparency in the process.

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