Foreclosure-driven reassessments, squatters & auctions: America's new real estate market

Foreclosure has turned many neighborhoods into ghost towns, creating vast tracts of vacant, devalued homes, which are slowly becoming havens for vagrants, drug addicts and crime. Around the nation, hundreds of thousands of homes are sitting vacant, contributing to a mass post-foreclosure nightmare for thousands of communities, while squatters, investors and banks jockey for position in the new real estate reality.

Entire sub-divisions of new homes and many established neighborhoods have become havens for wandering dogs, adventurous pigeons and legions of homeless squatters, as their former owners walk away from homes that are now worth less than the mortgages, which encumber them. Foreclosed, abandoned homes continue to drag down the value of surrounding property, part of a process which is causing panic in some state and city governments as the tax bases dwindles and loses value.

The son of sharecroppers, Representative Elijah Cummings of Maryland, speaks of the pride, which his parents found in purchasing their first home. He says “Those who are not at risk of foreclosure can still be hurt by the fallout. Foreclosures are linked to increases in vandalism and crime in neighborhoods. Additionally, for every home that undergoes foreclosure, the surrounding homes decrease in value.”

California has been particularly hard hit by the real estate crisis. Local governments are hard-pressed to keep up with the reassessment process. Some don’t even have the staff to reassess property in a timely fashion. In an interview, one county official told a California newspaper reporter that the job was humongous, and was beyond the ability of local governments to complete in a timely fashion with current staffing.

"It is a huge job," said Orange County Assessor Webster J. Guillory, who, like officials in other counties, still expects growth in the overall property tax base. "We will do it with existing staff and lots of overtime paid for weekend work and 10-hour days. We don't have nearly enough staff to do this level of work." (LA Times, 3-21-08)

While the local tax agencies gear up for a massive reassessment job, the face of the real estate industry is changing, and with it, the face of the nation’s neighborhoods. Billions of dollars in real estate is up for grabs, by “fire sale” auctions. However, even more may be targeted by squatters, or those taking advantage of “adverse possession” of the now foreclosed, abandoned property.

Adverse possession is a time-honored way for squatters to acquire legal title to somebody else’s land. Here’s how it goes:
Adverse possession requires the actual, visible, hostile, notorious, exclusive, and continuous possession of the property, and some jurisdictions further require the possession to be made under a claim of title or a claim of right. (Foreclosuretrackers.com)

With all of the foreclosed property glutting the market, much of it unsaleable, what is to stop an urban squatter from taking advantage of this real estate goldmine, setting up camp in one of these homes and claiming it after a few years? How much money will the banks be willing to invest in private security for millions of foreclosed homes? How would a neighbor know if a home is legally or illegally occupied? And why should a neighbor report squatters if they fend off others?

The question arises, then, who will manage these properties? How much will it cost to hire managers for the millions of homes that are expected to be foreclosed upon over the next 5 years? Many banks simply board up the buildings, put a for sale sign in the front yard and leave the property sit—leaving the field wide open for urban squatters.

If the real estate market drops dramatically and there are more homes up for auction/sale than buyers, what is going to happen to those homes in the ensuing economic downturn? Will the homeless, dispossessed and domicile-impaired “respect property” and stay out in the cold rather than occupy foreclosed property?

Will the “property owner”—that is, the bank or mortgage company holding the title to the property, have the ability or desire to protect their claim in a flooded adverse market? Will cash-strapped cities and towns spare the police manpower to enforce trespassing laws?

The leading edge of the foreclosure crisis has just begun and already there are so many homes being foreclosed upon that they are beginning to choke the real estate sales pipeline. In short: too many homes, too few buyers.

Always a leader in the real estate market, LA continues to be the bell weather for the nation. The LA Times notes “Fresh foreclosure stats indicate the pipeline of homes for sale in Los Angeles is filling up quickly -- with recently foreclosed homes.” (Ibid)

In some markets, foreclosure auction sales now outnumber regular home sales. (See LA Times figure below)
Month Sales (DQ) Foreclosure auction sales (ForeclosureRadar)
Nov. 4,468 1,653
Dec. 4,430 2,138
Jan. 3,398 3,201
Feb. 3,468 2,496

There are so many foreclosed homes in the economy that many banks are now auctioning thousands of homes at single auctions. A press release from real estate auction firm reports that more than a thousand bids were placed on 119 auctioned homes at a single auction in March.
National Home Auction Corporation, a foreclosure and builder closeout auction company, completed another blow-out auction event on Sunday, March 16th at the Los Angeles Convention Center in downtown Los Angeles. The event hosted an energetic and diverse crowd of approximately 2,000 people looking to purchase their first homes, investment properties and second or vacation homes. A total of 1,065 bids were made on 119 homes during the all-day event. (Press Release)

The company plans similar events in several cities across the nation in the next few weeks in Phoenix, Las Vegas and Denver. And more is on the way from the nation’s banks.

In Detroit, a glut of foreclosed real estate generated plans for a 500 home auction. According to the organizer, the properties have ‘clean titles’. The press release for the event notes that, “According to literature provided by Hudson and Marshall, the company operating the auction, all properties have insurable title, no back taxes and no liens.”

One real estate analyst noted that many would be buyers are afraid to even attend an auction because they think the prices are too high. Many are unaware of the discounts available. Sean O’Toole, founder and president of ForeclosureRadar.com told an interviewer “Thirty-one percent (of foreclosure sales) are being discounted 30 percent or more,” he says. He also says “There are some fantastic deals right now.” (Centralvalleybusinesstimes.com)

Why are there so many “fantastic deals”? Because the banks and mortgage companies want to unload these turkeys before the bottom completely drops out of the market and scores of entrepreneurs are filling need, in including one company, which specializes in on-line real estate auctions. According to its press release investors can save time and aggravation by using an on-line auction:

In the current housing slump, even the most well-regarded, high-quality builders have standing inventory that they want to sell in the fastest manner," comments Bill Lange, president of the LFC Group of Companies. "Not only are auctions the most effective way for sellers to market real estate, but our online auctions are the most convenient way for buyers to purchase a home. Rather than having to waste an entire day in a crowded, chaotic hotel ballroom or convention center, buyers can simply logon to the Freedom Realty Exchange website, review detailed property documents, visit the home in their own time and then place a bid from the comfort and privacy of their own computer. It's that easy." (Press Release)

In some markets, the economy is in such bad shape that nobody even shows up for the auctions. One real estate auctioneer told a reporter that his job is a lonely one. In his market, nobody even bothers to show up at real estate auctions. The Washington Post notes that real estate is no longer a hot property with the latest economic downturn.

With record defaults, an existing glut of homes on the market, analysts say banks can’t afford just to dump foreclosed homes in the market in some sort of fire sale frenzy. Driving down the price of their real estate holdings in a fire sale would be against their best interests—particularly because prices have yet to bottom out.

"Right now in most markets, the banks can't dump these [foreclosed] houses, and as an investor, it can be worth your while if you've got the guts to do it," said Bert Whitehead, president of Cambridge Connection Inc. in Franklin, Mich. As in any other type of real estate cycle, the professionals advise a keen sense of location when it comes to such investments, and nobody is promising that the market has found its bottom yet. (Investment News, 3-21-08)

Investors are getting picky. They don’t buy everything. They don’t generally buy in neighborhoods, which have a lot of foreclosed/abandoned homes, either.

"It's not a good idea to buy a foreclosed house in a neighborhood where there are a lot of houses for sale," he said. "Investors are moving quickly, and they're going after the good deals, but the key is buying in a solid neighborhood where there are fewer homes on the market." (Ibid)

Bottom line is we haven’t seen the worse of this real estate catastrophe yet. More homes will be foreclosed on, adding to the already depressed housing market, driving down the price of real estate even more, decreasing tax bases and encouraging more homeowners who owe more on their homes than the home is worth to simply pack up and walk away.

For some real estate investors, turning these homes into rental property or reselling them will be quite profitable. But, what about the abused, misused, in the wrong neighborhood, deteriorated property?