Foreclosures: The dark side of the American Dream

Real Estate Articles from Inman News

By Glenn Roberts Jr.
The darker side of owning a home is losing one.

And that's why Kimberly LaBell tells prospective buyers of bank-owned foreclosure properties to carry a flashlight. "Often they're boarded up and there's no light," she said.

LaBell, who has a growing business in the greater Detroit area handling bank-owned foreclosures, also known as real estate-owned, or REO, properties, said, "We don't hold open houses on these properties. Ninety-five percent of them are dirty and need repair. Basically we just make sure (buyers) are dressed comfortably and appropriately for the environment and have flashlights."

If home ownership is the American Dream, foreclosure is the nightmare. But this misfortune for some homeowners also presents an opportunity for real estate agents and bargain-hunting buyers alike. With a nationwide surge in foreclosure properties, LaBell and other agents have found a booming niche in working with foreclosure sales while the standard market is stagnant.

The work is not glamorous, and it can be dangerous.

"One of our agents goes out with her spouse if it's in a questionable area. In rougher areas we always go early in the morning. We never ever go at night. We walk around the home before we go in -- make sure there are no broken windows or open doors. We talk to neighbors, ask them how things have been around the house, if (they've seen) any funny activity," said LaBell, who is team owner for the LaBell team, a group of real estate foreclosure specialists affiliated with Premier Realty Group in Trenton, Mich. "Keeping them clean and crisp is 90 percent of the battle. A lot of homes are broken into several times a week."

She added, "Some of our agents have taken personal safety classes and self-defense. Some agents carry a concealed weapon." Some carry Mace. "It just depends on the agent."

The LaBell team, which focuses on a five-county area surrounding Detroit, includes four agents, and LaBell is in the process of hiring three more. The team is handling about 230 properties "and it grows by the week," she said. "Probably by the end of 2007 we'll see 300-350."

The volume of foreclosures in the area is about four times higher than it was five years ago when LaBell began working with bank-owned real estate, she said. "The values have dropped so drastically," and banks are experiencing portfolio losses "in the millions." A report last month by First American CoreLogic Inc. predicts 1.1 million foreclosures nationwide in the next six to seven years among adjustable-rate mortgage loans that originated from 2004-06.

With rising foreclosures, price depreciation has accelerated in the Detroit area. LaBell said it's common for foreclosure properties to sell for $35,000 to $40,000 in Detroit and surrounding areas, with prices roughly double that in the suburbs. But foreclosures come in all price ranges these days, she said. "There is no typical (foreclosure) anymore. Everything is foreclosing."

And several agents in the area are attempting to represent foreclosure properties to get in on the action. "We've seen huge growth in the amount of agents who claim that they handle REOs," she said, including agents whom she said may not be surviving in the traditional market.

Newcomers, she said, "are not always prepared for what the reality is in that marketplace. They don't understand the differences, and they don't always understand the buyers' mindset either." Buyers of foreclosure properties can include savvy investors, she said.

"It takes somebody who's not timid to work in different markets. We have a lot of very, very rough neighborhoods that we have to go into." Agents working with foreclosure properties have to regularly inspect properties and work with cleanup crews and handle the eviction process -- in some cases working with law enforcement to forcibly remove homes' occupants.

"All of these things are extremely intimidating for the traditional agent," she said. "The pay is small and we make a living by handling volumes of properties at a time. If you're looking to get rich on a couple of properties it's not going to happen."

Banks can pay a commission ranging from 4 percent to 6 percent of the property's sale price, and in some cases the bank asks for a referral fee that can range from a flat fee of $300 or more to 1 percent of the sale price.

LaBell specializes in working with buyers and in some cases she earns the full commission for REO properties because the buyer is not represented by an agent. A former salon owner, LaBell shifted her focus to foreclosure properties as the real estate market turned. She began mailing resumes to banks, and received broker procedure packets that outline performance expectations. "After that point you try a listing (for them) or they have you do several price opinions to view your assessment of the market."

These broker price opinions, or BPOs, are like an informal appraisal of a property. In some cases banks request BPOs in conjunction with an actual appraisal to gauge a property's market value. Foreclosure properties can carry more risk for buyers than traditional properties because they are in as-is condition, lack a seller's disclosure statement and the utilities may be shut off.

Banks will hand off properties to LaBell's team at different stages of the foreclosure process, and it's common for her company to be involved with a foreclosure property before the home's occupants have been evicted. In these cases the banks are typically willing to make a "cash for keys" offer in which they offer money for the home's occupants to relocate.

"Often it's tenants who didn't even know there was a foreclosure, or a homeowner ... they don't necessarily expect a person to show up at the door," LaBell said. "Sometimes evictions get really rough. Sometimes the occupant moves back in and you have to keep booting them out multiple times."

Landlords are struggling to keep the rental income flowing in the Detroit area, she said, and are losing properties "left and right because they can't keep them occupied and keep the rents steady. That's a huge part of the foreclosure rate." Over-mortgaging is also a problem, she said, that is magnified by depreciation of 20 percent to 40 percent in some areas.

The market won't likely bounce back for several years, she said, perhaps seven to 10 years in the city of Detroit. In the mid-1990s the market was hot and houses sold within days of listing. Appreciation rates in those days were "just astronomical," LaBell said. "Now it's just a complete 360. We definitely had our bubble burst and every market needs that, unfortunately, at some point."

Foreclosure auctions are becoming more commonplace now, LaBell said, as foreclosures are saturating the market.

"There is a client of ours that has 700 foreclosures a month, on average. With the volume that (banks) are holding in their portfolios it's imperative that they move them quickly," she said.

While it can take anywhere from 48 hours to a week just to get a counteroffer for a single bank-owned property, auctions can speed up the sales process but don't allow a lot of time for buyers to conduct market research.

Skilled investors can do well at auctions, she said. "(Auctions) attract the typical investor who is doing it full time for a living. They can glance at a property and know what it's going to cost them (to rehab)," she said.

Her company's investor clients "may walk away with 10 properties in one weekend" from an auction, she added.

In her past career, LaBell owned a beauty salon. She said she is glad to be working in real estate, and to have steady business during tough economic times.

"That's my reward -- making a living when most are not," she said. Not everyone in Michigan is so lucky, as the state's unemployment rate is among the highest in the country, at 6.6 percent in February.

"When the market isn't moving it's a reward to stay in the business and to not give up on the dream that I've had of being a licensed Realtor. Also, (I'm) able to employ a lot of other agents who are struggling in the business. I came into this business because I cared about people and I loved homes and architecture. After I sold my salon, (real estate) allowed me to be connected to the public." REO properties now make up about 75 percent of LaBell's total business.

Dominic Monariti, a real estate agent who works with REO properties in the Houston, Texas, area, said he feels for the homeowners who ended up in foreclosure. "I kind of blame it on the agent sometimes -- not explaining to them the kind of loans there are. I think a lot of responsibility lies on the agent's hands. I warn all my clients that they don't want to get the (adjustable-rate mortgage) -- it's basically the ARM that's going to throw them out of the house in the long run." Owners in some cases don't seem to realize what they were getting into, he said, or they couldn't buy the home with a more conventional mortgage loan.

Foreclosed homes can take a lot of rehabilitation to make habitable in some cases, he said, adding that he has seen properties that are missing faucets and sinks "and sometimes the toilet bowls." Monariti works for Performance Realty Inc., a company that specializes in REOs.

The national rise in real estate sales, followed by a boom in foreclosures, is like "a vicious circle," Monariti said, with super-low interest rates getting people into homes and a subsequent rise in interest rates and resetting of temporary loan rates leading to the loss of homes. "Who's benefiting from this?" he asked.

Foreclosure homes are selling close to market value these days in the Houston-area market, he said. The buyers can be individual investors and investment companies. And they typically are buying the properties to turn into rentals, he said.

"People are quitting their full-time jobs and becoming investors now," he said. Investors from California have shown a lot of interest in the Texas market, he said, and he recently received a call from a woman in Italy who wanted to buy a townhome to rent out. "There are more and more foreclosures on a regular basis. I can't even keep up with the hundreds of foreclosures that come on the market."

Lora Darter, a Realtor for Stanfield Realtors Inc. who works in the North Texas market, said she has also seen a rise in foreclosure properties. "It seems to me there are more foreclosures on the market and they are staying on the market longer," she said.

She said that buyers of new homes in some cases faced rising interest and tax rates that they did not expect. "When you purchase a new home a lot of times they have to estimate taxes at the time," she said, so that the actual rate is actually higher.

Typically, homeowners wait too long before trying to work their way out of a foreclosure process, she said. Darter said her buyer clients in some cases ask to see foreclosure properties, though typically they don't end up buying these properties.

"It's a little more risky, a little scarier (for typical buyers)," she said. "You never know what you're going to find when you walk through the door." While some properties are rehabilitated to move-in condition, there are others that "you walk through the door and it looks like a bomb went off in there," she said.