Foreclosed Homes Sell At Steep Discounts

Posted by: Chris Palmeri on December 18, 2008

hemet.jpg

I went to a bank-owned home auction run by ValueHomeAuctions.com on Saturday. The event, in downtown Los Angeles, started at 9:30 and it was only half-way done when I got there two and half hours later. They were auctioning off over 140 homes.

Compared to an auction I went to earlier in the year, this one had probably half as many people. And there was no free coffee! This event had cheerleaders though—well they were auction house employees clapping on the sidelines during the bidding to get folks fired up.

Just to make it clear, these are not sheriff’s auctions where people lose their homes to the bank. These are homes that have already been foreclosed on. Typically the bank has tried to sell the property through local Realtors and unable to do that now just wants to get rid of it.

Another thing I noticed about this event was much lower prices. Six months ago homes at the auction I went to were selling for about 60% of the “previous value” which is typically what the bank had last listed it when it was trying to sell it through a real estate agent.

Here are some of the prices I saw:

A five bedroom home in Norco, Calif., way out east of L.A., had a starting bid of $136,000 and sold for $390,000. It was previously valued at $990,000.

A three bedroom, three bath in Menifee, again one of the those far out but still nice Los Angeles suburbs, went for $130,000, twice the starting bid of $58,000 but about one third of the previous value of $431,000.

A four bedroom house in Hemet, again one of those far east suburbs, went for $125,000, twice the starting price of $54,000 but one-third the previous value. You see a pattern here?

Although I didn’t inspect any of the above mentioned properties they all looked like fairly decent houses, built during the boom and bought by people who for one reason or another, couldn’t keep them. That’s the house in Hemet in the photo above.

By the way, today’s Los Angeles Times has an article about how the state is—for the fourth year in a row—seeing more people leaving than moving in. A trend entirely related to what I saw on the auction floor.

Reader Comments

chris

December 18, 2008 5:42 PM

have you waken up, or not yet?

wylieman101

December 18, 2008 5:46 PM

I am not surprised that these houses are selling for such low prices. This is the only way the banks will be able to get rid of these foreclosed houses. The houses are over priced and until the banks realize this, they will continue to sit on a stock pile of foreclosed houses with no buyers. IF THEY DRASTICALLY REDUCE THEIR PRICES, THEY WILL SEE LOTS OF BUYERS.

Not me!

December 18, 2008 6:27 PM

If it's true that many homes are selling for 1/3 their previous value, there is absolutely NO reason for homeowners in similar homes to not to file bankruptcy and move out. I wonder how what proportion of of the real estate market has similar valuations??? Scary stuff...

Mark

December 18, 2008 6:59 PM

California use to be what you could describe as the "place to be" but with the economy being what it is, who in the world could afford to own a home out there let alone survive? I know why the houses are going for these prices and people are leaving. It is the market correcting itself. Everyone had to know that the day of overpriced housing was going to go the way of the dinosaur. Im not glad but its nice to see reality starting to set in for California for probably the first time in 20 or 30 years.

KB

December 18, 2008 7:41 PM

The government, house owners (investors) and housing industry wants to artificially hold on to the current costs; not realizing that it is difficult to hold on to a crubling structure. Let it fall, pick up the good pieces and rebuild - that is good for country and people in the long term. Any short term measures will boomrang and continue to haunt in future.

matt

December 18, 2008 7:49 PM

It should remind everyone; the only price you should ever pay for a home is one in which you put down a minimum of 20%; the monthly payments, assuming an 8% 30-year mortgage rate are no more than 30% of your 3-year average pay, after taxes, annually; and that you have enough socked away for 6 interest payments without working. If you can put less down, get a better interest rate or are making more 'today', you have to use the same scale, and dial back the price point you are willing to take.

If you feel you can't afford a home with those constraints, my advice is: don't EVER buy one. Borrowing money is most often a bad idea. That our government has in its mind that a mortgage is somehow a healthy thing is sad. They think it tethers people to responsibility, but it really preys on people who don't understand leveraged assets--they are inherently risky.

There is no shame in renting, and using a mortgage style payment plan to invest in bonds and perhaps utilities equities, it will probably produce as good if not better a return in the long-run because your 'asset' will start generating increasing amounts of income, well in excess of inflation.

ON a brighter note...these very low prices mean more and more people will qualify for Federal loans at preferred rates. Marry that with now lower prices for homes, discretionary income will start to lift and we can restore housing wealth capital reformation, get the country back on solid footing.

Remember: high home prices are major major tax on future growth, wealth and ultimately disserve everyone except the real estate agent who sells you the place.

Phil

December 18, 2008 7:53 PM

I too was at the auction and this my third auction that I have attended. And I think the trend will continue this way for next 1 to 2 years base on historical date I have studied since 1930. Normal value increase have been around 3-5% per year for last 70 years and increased significantly 100% in 2004 and 2005. Seasoned investors saw it before 2006.

Mansoor Jan

December 18, 2008 8:11 PM

NO PROBLEM! Let the banks keep sitting and sitting till its down another 30%. Than again, why would the banks care? They have a pretty big check coming to them.When you really start to disect this HUGE matter, you than understand that the banks never lost any capital.Why? We are dealing with intrest.A pure profit margin.

Not Prime Real Estate

December 18, 2008 8:38 PM

What people seem to be missing is that these homes are all "way out East of LA" - that is much different from Beverly Hills or Malibu or even Silverlake. This is a completely different type of market, and although yes, people in the premium markets may also be struggling, property values there are still holding strong as a general rule. Let's talk about all the foreclosures in the 310 and what those homes are selling for...

PB

December 18, 2008 8:52 PM

Good, now house prices only need to drop another 20 to 30% in order to return to long term fundamentals.

Barb

December 18, 2008 10:56 PM

I live in the Atlanta, GA area and have 250 homes in my subdivision. I'm one of the "stupid" people who has been paying my mortgage on time. Well, houses all around me are vacant and foreclosed and the banks are selling them (thru realtors) for less than 1/2 what my outstanding mortgage is on my home. So what do I do now? I've got good credit,job, etc. should I just go buy one of those for less than 1/2 my mortgage here and then move in, and quietly leave the keys to this house on the kitchen counter and walk away from it? It just doesn't make financial sense any more to keep paying on this house when the value (just to equal my mortgage) will probably take more than what's left of my lifetime to break even. Wow, am I frustrated for following the straight and narrow and doing the right thing all these years.

Midwest Mel

December 19, 2008 1:47 AM

I live in Spring Green WI where we never had a boom or bust.

Darn.

Jose

December 19, 2008 3:54 AM

First none of these houses were ever worth $990,000. Think about it, $990,000 is $10,000 short of $1 million. These were just inflated prices that idiots bid them up to. Hemet is halfway between LA and the Salton Sea. It would take anyone way over an hour on the highway to drive to a decent job from there. I think that even $390,000 is twice what it is worth. I bet a flipper won the auction for $390,000 and we will see this house on the market for $700,000 soon. The flipper won't sell it. The flipper will default on the mortgage within a year and hand the bank another bad loan.

Anna

December 19, 2008 7:14 AM

This article is the reason why the vicious cycle of foreclosures will continue. If you are the guy living next door to a home that was once valued at 900K going for $390, you ask yourself why stay? Is it better to take a hit to my credit for 3 years or to sit in my home, pay the mortgage only to find that in my LIFETIME this home will never be worth what I paid for it and if I have to move for work, how would I ever sell this home? Expect a housing slump for the next 10 years.

Realista

December 19, 2008 8:32 AM

In Florids, # 3 in Foreclosures...

The Banks are Putting Up REOs At Mortgage Balane... and Few are Selling.
Banks Inventory of SF and Condo Homes is Rising 9 to 10 Percent EACH MONTH!

dave

December 19, 2008 11:25 AM

Just remember that most people trash the houses before leaving them. They rip out copper wiring, pipes, cabinets, etc. They smear human excrement all over the walls -- google it. A foreclosed liar-lone house problem has many, many unseen problems and these auctions prevent you from inspecting the house before buying it.

Seattle Renter

December 19, 2008 1:05 PM

Everyone should be *happy* to see these drastically reduced prices. It means that prices are coming into line with incomes and rent. Who can afford to live in a far-flung suburb if the house costs $500K?

The sooner we find the bottom, the better off we'll be. At the right price, you will certainly find buyers.

There is so much pent-up demand among the under-forty crowd, who weren't looking to buy until the bubble began. While some undoubtedly acted foolishly and bought beyond their means, many remained sidelined because they were realistic about their budgets and wanted to live within their means. When average prices are affordable to average people, you'll see more buyers than you ever imagined.

And although there's much talk about how difficult it is to get a loan these days, don't believe the hype. Yes, it's difficult for *unqualified* buyers (read: buyers with poor credit) to get a loan that far exceeds their ability to repay at their current income levels.

However, the GenX and GenY folks who've been sidelined due to high prices coupled with fiscal responsibility are *not* going to have these problems. These people, who've been *renting* all their adult lives and living within their means have by and large have *excellent* credit. And since they want to buy a house they can actually afford on a 30-year, fixed-rate loan, they'll have no trouble qualifying.

David the Renter

December 19, 2008 10:55 PM

These are NOT Steep discounts. The homes sold were at the correct values where they should have been in the first place. Don't turn a value correction into a discount.

Ricardo

December 20, 2008 1:51 AM

If I can get a decent rate mortgage to finance any one of those houses, I am buying! I am one of the few lucky ones that has a good job and need to buy a house not too far from Pasadena, where I work. I am serious!

Joe Rogan

December 21, 2008 11:10 AM

Come'on people. This is not real. Ah-bama is gonna' turn this thing around. He's the greatest thing since sliced cheese. You'll see, before long he'll get the houses back to where they were - and beyond. Houses in So california and all over will be going up $1000 a day, $400 a day isn't enough anymore. Meanwhile the salaries will be cut 50%. Yea !! The flipper-nation is alive and well. We're all going to be rich !! yea !!!

Adealia Artist

December 21, 2008 4:45 PM

We sold our house for 499,900 in March 2006. We paid 224,500 for in March 2002. Our take away after all fees etc was $286,456. We were the lucky ones. The people who bought our house couldn't sell it for anymore than 240,000, and to do that they would have to be very lucky. Who do you blame for this mess anyway? How about everyone of us for being greedy and not paying attention. Personally, I think the people of the United States are so corrupt morally that more pain is on the way. Nothing like pain to change things.

stephenbuilder

December 21, 2008 10:32 PM

Could someone explain to me how houses can sell for less than the cost to build them??? maybe if everyone in the building industry wants to cut their prices including material houses, contractors and state and county for their outrageous fees... worksmen comp, developer fees etc.. then maybe I could understand... It is just supply and demand, pure and simple.. these prices do not make sense anymore certainly not for people in the building industry.... when the glut of houses will be absorbed, which might take quite a while, prices will inevitably go up..

Snoz

December 22, 2008 11:07 PM

They are still over priced. Norco, Hemet, and Menifee as well as Moreno Valley, Elsinor, and Perris, etc. are out in middle of god forsaken desert where the builder bought the land for next to nothing. Without a local economy to provide meaningful employment and a costly long commute into urban LA or Orange County, $60K is more realistic. Norco at $390K sounds suspiciously. It probably is another real estate scam promotion to prop up fallen prices. The desperate real estate businesses have resorted to Madison Avenue and the Spin doctors to perform under-the table tactics including the dissemination of propaganda. BW readers should be aware of sales promotion masqueraded as news.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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