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Buy-low brigade

Multiple bids? In this market? Well-priced, lender-owned properties aren't sitting empty for long these days. Many are pulling in offers and selling quickly.

June 01, 2008|Dinah Eng | Special to The Times

The market may be down, but sales of bank-owned properties are picking up, with multiple offers being made in many cases as lenders drop their prices to move foreclosed homes off the books.

REO homes (bank shorthand for "real estate owned") that are in good condition and listed at $300,000 or less are drawing as many as 15 to 20 bids from home buyers and investors looking for bargains, area real estate agents report.

Aimee and Cory Brown couldn't afford a down payment in 2003, so they partnered with Aimee's mother to buy a five-bedroom house in Murrieta that year. The family sold the house in 2005 and moved into a rental, intending to buy up, but found prices still too high for their budget.

"We ended up making an offer on a short sale in March, but since those take a while, we kept looking," Aimee Brown said. "Four days later, I found a four-bedroom, 2 1/2 -bath house for $225,000 online. It was a bank repo and had eight other offers, so we offered $250,000 and got it."

The house, a mile and a half from the Browns' rental home, was in good condition, with a Japanese plum tree in full bloom in the frontyard. When the couple's first son died, Brown said, she wanted to have a house one day where she could plant a Japanese plum tree in his memory.

"When I saw the tree at this house, I took it as a sign that it was meant to be ours," Brown said. "We looked at so many bank-owned properties that had been trashed. We didn't have the equity to redo a house completely, so this one was perfect. We'll have to buy more furniture because we're going from 1,300 square feet to 2,100 square feet."

Earl Bonawitz, general manager for Century 21 Wright in Temecula, said his company handles 120 to 150 bank-owned properties at any given time and has watched REO prices drop. Banks and investors who own the loans hire asset managers to oversee REO properties. The vast majority of asset managers, Bonawitz said, then hire real estate brokers to do the actual property listings.

"It costs a bank about $5,000 a month to hold a property," he said. "A $650,000 to $700,000 appraisal a year ago in some areas is now worth about $350,000. It took a while for the banks to adjust their mentality to that. Right now, anything under $300,000 is a hot price.

"It's a seller's market with REOs. Once a bank accepts an offer, they send out addendums that are nonnegotiable. If you don't want to sign them, fine, they've got other buyers. The addendums say you'll close by 'X' date, and if you don't close by then and it's your fault you'll pay a $100 to $150 penalty per day. They choose the service providers for escrow and title."

Victor Benoun, president of the Mortgage Source Inc. in Studio City, said that in some cases a bank may be financing the loan itself on a foreclosed property to make up some of its loss in a lower sales price or in an effort to make sure it has a buyer whose offer won't fall out of escrow.

Although the lowest Southern California prices may be found in the Inland Empire, where many sub-prime borrowers defaulted, Benoun said foreclosed properties also can be found throughout Los Angeles County.

"We just had a house south of the boulevard in Woodland Hills that was listed at $250,000, and it was bid up over $500,000, which was the market price," Benoun said. "Banks are trying to get as close to fair market value as they can, but we've seen prices fall because there's such a huge supply of foreclosed homes on the market."

Retirement money

Kirby Palmer, a clinical social worker who owns a home in Claremont, decided to buy an REO house in northern Rialto in January to flip as part of his retirement strategy. He said because he's self-employed it was too costly to get conventional financing; lenders were asking for 20% down with interest rates of 8.5% to 9%.

So he went to what is known as a hard-money lender. These companies offer short-term loans based on a projected future value of the property and charge higher interest rates than banks.

The lender required a 10% down payment, as well as six months' worth of mortgage payments and the construction costs upfront at 13% interest for a six-month loan.

Palmer rehabbed much of the house himself and was paid back the construction costs by the lender as the work progressed. All told, he put up $64,000 on a $238,000 house.

"I was one of several offers and didn't get it the first time because someone bid higher than me," Palmer said. "But when that offer fell out, I got it."

The property had been stripped of all copper wiring and the air-conditioning unit.

"I went in the first day with my sons and had to kick out a squatter," Palmer said. "We cleaned up the yard, repainted, put in new vanities, new light fixtures and new carpet."

He put it back on the market at $349,000 in March but has had no offers yet.

"If it doesn't sell, I can rent it out and wait for the market to bounce back," he said. "It's not a huge risk."

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