Bargain hunters must wait
On Kentucky Derby Drive in Moreno Valley, the houses with “for sale” signs on their lawns boast Craftsman-style facades, roomy floor plans and granite-countered kitchens.
Four of the nine have something else in common: They’re owned by lenders.
Saddled with properties the borrowers could no longer afford, banks and mortgage companies have joined the legions of individual homeowners trying to sell on the open market -- and at a pace not seen in more than a decade.
The trend could further weaken a housing market already pinched by high inventories and tougher lending standards, although experts say it’s too soon to tell how extensive the damage will be.
“They will make a contribution to the erosion in property values,” especially in neighborhoods that attracted marginal buyers with shaky credit, acknowledged Robert Kleinhenz, deputy economist for the California Assn. of Realtors. But he added, “How this plays out both directly and in a market psychology sense is going to be difficult to estimate.”
Currently, nearly 3% of the homes for sale in Southern California are owned by lenders, according to home-search website ZipRealty, up from less than 1% a year ago.
“Volumes are increasing, definitely,” said Patrick Carey, the executive in charge of foreclosed properties at Wells Fargo & Co.’s real estate division. The San Francisco-based bank is managing more than 800 bank-owned homes for sale in Southern California.
During the real estate downturn in the 1990s, lenders eager to unload foreclosed properties sold them at steep discounts -- helping lower values overall, Kleinhenz and others said.
So far in the current cycle, lenders aren’t offering fire-sale prices, but that could change if sales remain slow and lenders slash prices to clear their inventories.
“Like any seller, they have a cost to carry,” said Mike Ela, founder of home-valuation service HomeSmartReports.com “Eventually they will feel the heat of having a nonperforming asset on their books and lower the price.”
Lenders, however, say they are being careful to ensure that doesn’t happen.
“The impact on the neighborhood and the community is vital with us,” Carey said. “We don’t want to flood a community with below-market-priced homes and cause further deterioration.”
One study suggests that discounts are likely to become common if foreclosures -- which increased 18% in Southern California from March to April alone -- keep rising.
Owners are likely to discount their asking prices 20% or more in communities where foreclosed homes make up 8% or more of sales, according to the study by Christopher Cagan, an economist with title insurer First American Corp.
In 1995, at the depth of the region’s last housing downturn, lender-owned homes accounted for 7% of all sales -- and sold at an average discount of 15%, the study found.
Currently, about 3,000 of the 120,000 homes listed for sale in the five-county Southern California region are owned by mortgage lenders, according to Emeryville, Calif.-based ZipRealty. That’s up from fewer than 10 homes a year ago.
Lenders reclaim ownership after a borrower defaults on the loan, a process that usually takes months. Once they have title, lenders put houses on the market much the same way other sellers do -- by enlisting the services of real estate brokers.
Experts contend that bank-owned doesn’t necessarily mean bargain, at least at this point in the market cycle. “The property is priced at a point where it’s not dragging down value,” Carey said.
Each foreclosed home represents a failed loan, however, and some lenders are reluctant to discuss their swelling inventories.
Countrywide Financial Corp., the nation’s biggest home-loan provider, declined to comment about the homes it was selling. On its website, the Calabasas-based lender offers a list of foreclosed homes for sale that tops 8,900 nationwide, up 60% since January.
Among the three dozen homes on Kentucky Derby Drive, which is part of a 3-year-old community of new homes, the four lender-owned houses appear similar to the other properties for sale, except for one telltale sign: browning lawns, an indication that the homeowner is no longer there and gardening service is spotty at best.
Otherwise, the houses are in good condition. Real estate broker Mike Novak-Smith gave a visitor a tour of a near-showcase home that featured gleaming stainless-steel appliances, spotless buff-colored carpeting and fresh eggshell-tone paint -- improvements made by the bank after the former owner moved out.
“A lot of times the lender feels it’s better off selling something that is repaired,” said Novak-Smith, who specializes in bank-owned real estate in the Inland Empire.
It’s only in the narrative of this particular property’s description in the multiple-listing service and in its brochure -- amid the language about the gourmet kitchen and spacious backyard -- that the phrase “bank-owned” appears.
Even the prices of these homes are on par with the neighborhood’s. The asking prices on Kentucky Derby range from $395,000 to $450,000, with the bank-owned homes falling squarely in the middle.
“The banks will price at the point of the market where homes are selling -- that’s their goal,” Novak-Smith said. “They won’t sell for $30,000 less.”
Novak-Smith routinely receives extremely low offers, sometimes as much as $150,000 to $200,000 below asking price, but he said they were almost always rejected by the lenders.
When he gets a call from a lender to take a listing, Novak-Smith inspects the property, then reports to the bank any significant problem such as a leaky roof or missing water heater.
When improvements get the green light, it’s up to Novak-Smith to get them done, so he relies on an established network of handymen, gardeners, locksmiths and cleaning companies to handle the jobs.
To be sure, there are plenty of properties left in shambles by people who know they are about to lose their homes, and often Novak-Smith must oversee weeks of trash removal and major refurbishment before the house can go up for sale.
And he must front all the costs. He and other agents who handle bank-owned properties are not reimbursed until the property is sold, and they typically accept a reduced commission, usually 2% to 2.5% per transaction, compared with 3% from a private homeowner.
That’s a trade-off Novak-Smith is willing to accept for receiving a steady flow of listings and for working with sellers who are all business.
“There’s less emotion involved than with a regular transaction,” he said.
Right now, lenders are hearing that not much is selling on Kentucky Derby Drive, or in most other Southland neighborhoods. Sales in Southern California are down 30% year over year.
But Novak-Smith’s phone is ringing off the hook with people hoping for a bank-owned bargain.
“I tell them to expect a reasonable deal,” he said.
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Rising inventory
Lender-owned homes represent a tiny share of the 119,000 existing homes for sale in Southern California, but the number has risen sharply to more than 2,600 from about 10 a year ago.
Number of lender-owned homes by county (as of June 4)
Riverside: 1,049
Los Angeles: 963
San Bernardino: 333
Orange: 209
Ventura: 106
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Source: ZipRealty
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How to find a foreclosed home
Mortgage companies: Many lenders’ websites include a list of homes they are selling. Alongside the address of the property will be the name and number of the listing agent, usually a local real estate broker.
Websites and classified ads: Bank-owned properties can be found on home-sale websites by searching for the terms “bank owned,” “lender owned” or “real estate owned,” often abbreviated as REO. Property descriptions in newspaper classified ads will often include those terms as well.
Real estate brokers: Licensed brokers should be able to point you to bank-owned listings in their areas.
Paid services: There are several Web-based subscription services that provide foreclosure listings for a fee.
As with any home sale, negotiation on price is expected. Buyers typically purchase the property “as is” but do have the right to a formal inspection.
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Source: Times research
