Investors Foreclosure Appetite Grows, Headaches Arise

Investors Foreclosure Appetite Grows, Headaches Arise

reutersInvestors are flocking to home foreclosure sales in California and other states where banks have rescheduled auctions postponed last year to fix loan servicing flaws.

But often their intentions to purchase the distressed properties are still stymied by disagreements over a fair price or as auctions are simply canceled.

In California, bank-set “opening bids” won 14,068 properties from auctions last month, a 51 percent rise over December, said in a report this week. Investor purchases rose more than 50 percent to 3,272, but were dwarfed by the 12,279 auctions canceled, it said.

“There’s just not a lot of inventory” made available, said Sadie Gurley, a managing partner with New York-based GreenLake Investment Partners, a new entry into the field of investors seeking to profit from the “shadow inventory” building up on bank books.

“It’s like a funnel,” she said.

The trend is similar in other high foreclosure states, such as Arizona and Nevada, according to

Distressed property sales have accounted for a significant share of the housing market, rising to 36 percent in December from 32 percent a year earlier, according to the National Association of Realtors. The purchases can be made by investors or banks, which have ramped up “short sales” in which they agree to sell a home below the balance on the mortgage.

Investors -- who typically aim to buy, fix and re-sell the houses -- are lining up as banks restart foreclosures from moratoriums imposed last year to review faulty processes, such as “robo-signing” of court affidavits or other document issues.

Revelations of shoddy servicing further muddied the foreclosure process, which to investors is key to cleaning up excess inventory and aiding housing’s recovery.

Banks have limited sales to others by keeping their opening bids above what the local markets will bear, investors said.

On average, in California, investors are paying 25 percent below market value when winning the auction, versus a 15 percent premium bid of banks that take properties into their “real-estate owned,” or REO, portfolios, said Sean O’Toole, chief executive officer of

“In California, the average foreclosure is $150,000 upside down in the mortgage, so if the bank doesn’t drop the bid from the amount owed, there’s no chance the investor is going to purchase it,” O’Toole said.

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