Foreclosure: an auction adventure
A homeowner hoping to trade up discovers she must compete with the pros on the courthouse steps. It takes homework to find a true bargain.
MANY see trouble in falling home prices and rising foreclosures.
Karen Krynen sees opportunity.
So after dropping her two children off at preschool one day last month, Krynen headed for Los Angeles County Superior Court in Norwalk, where foreclosed houses were being auctioned on the steps outside.
The ponytailed Krynen spotted a small crowd gathered against the building's towering, black-marble portico. The two dozen or so bidders, mostly men, whispered into cellphones, tapped into databases from their laptops and juggled clipboards loaded with documents and printouts.
No one seemed particularly friendly.
"I walked up and thought, 'Oh no, this is what they do for a living,' " said Krynen, 42, clad in khaki capri pants and a jean jacket. "They had their Bluetooths, their computers.... They knew what they were doing.
"I kind of hoped that nobody else would be around."
Still, it didn't come as a complete surprise. Krynen had read the headlines: More and more homeowners are going into default as mortgages with low introductory "teaser" rates adjust to higher payments. There were 5,977 foreclosed homes on the auction block in Southern California in the first three months of the year, up from 711 in the same period last year, according to research firm DataQuick Information Systems.
Homes typically enter foreclosure when borrowers can no longer make their payments and can't sell their homes for amounts that would pay off their loans.
State law requires these properties to be sold at public auction, which in theory puts everyone on an equal footing. Amateurs such as Krynen, however, face competition from professional real estate investors as well as the lenders themselves, who come to the auctions ready to bid for homes they issued loans for if it appears that the properties can be resold at higher prices.
For years, Krynen had seen the ads and come-ons promising to reveal the "secrets" of buying foreclosed property. But the notion of buying a home this way didn't take shape until a few weeks ago, when she came across a website for Irvine-based RealtyTrac Inc.
The site offered a trial subscription to troves of foreclosure data, which are public but not very accessible. Krynen was intrigued. A few mouse clicks later, she found a house about five miles from hers in Whittier. The owners had defaulted on the mortgage and were facing an auction in two weeks. Opening bid: $100,000.
Krynen figured the four-bedroom home was worth about $800,000 and thought it would be the perfect replacement for the 1,400-square-foot house she and her husband, Jeff, have owned for 14 years.
"Think 'Brady Bunch' era," is how she described it.
But that's about all she can say about it. Although she has driven past the place at least a dozen times, she could never get inside for a good look.
That was lesson No. 1 Krynen learned about foreclosures: Buyer beware. You buy property "as is," with no chance of a pre-purchase inspection.
"That scared me a bit, that I couldn't see inside," Krynen said. But her husband, a professional contractor, assured her that he would be able to mend whatever needed fixing.
From her online research, Krynen learned that the road to a foreclosure sale in California typically begins when a homeowner misses three mortgage payments. The lender then files a notice of default with the county recorder.
If the homeowner fails to pay up in 90 days, the trustee -- usually the title company -- sets a date for a public auction.
By long-standing custom, most auctions are held outside courthouses or the recorder's office. Krynen found this aspect of the process especially appealing.
"If it goes to the courthouse steps, there's a level playing field," she said.
Neither local government nor the courts play a role, however. The title companies and other trustees hire professional auctioneers to run the sales. It's the real estate equivalent of last rites, making Kyle Speer something of a priest of property.
At 10 a.m. sharp each weekday, Speer, 38, takes his place on the courthouse steps in Norwalk.
With his back against the marble wall and his face to the crowd, the professional auctioneer cracks open his leather portfolio, clears his throat and begins the archaic ritual of "crying the sale."
A 17-year veteran of foreclosure auctions, Speer says he's seen a sharp increase in newbies such as Krynen showing up. Bombarded by questions from beginners, he recently began offering a $200 seminar every Thursday to decode the auction process.
One day last month, as Krynen stood off to the side taking notes, prepping for the upcoming auction of the Whittier house, Speer kicked off the bidding for the day's auction by reading the property's street address, followed by a long string of parcel numbers, deed numbers and loan numbers.
"Do I have any opening bids?" he asked. "Cashier's checks needed to qualify."
That was news to Krynen. Before entering the bidding, you must show the auctioneer a cashier's check good for at least the minimum bid amount. Auction pros carry cashier's checks in varying sums.
There were six homes on the block this day. They were bought in 2005 and 2006, at the crest of the housing boom, by buyers who financed the entire purchase. That means the homes are probably worth the same, or less, than the amount the buyers owe.
No one bid.
"I get asked every day if there are any good deals," Speer said. "Not too many right now."
Homes that aren't sold are turned over to the lender, which can then sell the property however it chooses.
When there is a bargain, a bidding battle usually ensues, pros say.
At 10:30 a.m., after Speer had finished, Travis Toth -- an auctioneer hired by other trustees -- stepped up to market a foreclosed condominium near La Cienega and West Jefferson boulevards in Los Angeles. The opening bid was $259,592, which was the sum owed on the mortgage plus about $20,000 in processing fees.
Right away, two men and a woman produced cashier's checks to identify themselves as serious bidders. Then the show began.
With cellphones at their ears and hands cupped over their mouths, the bidders bumped up the price in $1,000 and $100 increments. One man worked a laptop too, scrolling a title company's research page on the Internet.
"Are we in or out?" the woman whispered into her phone.
After 10 minutes of back-and-forth, the auctioneer calmly declared, "Sold."
The winner, a slight man with salt-and-pepper hair, handed over four checks in amounts ranging from $500 to $120,000.
He politely declined to give his name to a reporter except to say that he had been doing this for 11 years. A regular confided that the man worked for a property investment firm in Los Angeles.
Whatever his identity, he appeared to have scored a bargain. The final sale price was $267,500, more than $100,000 below its estimated value.
Deals like that give Krynen confidence that there are hidden gems at foreclosure auctions. But there are hidden traps also, she learned.
Properties often have more than one mortgage or other financial baggage such as tax liens. If the auction buyer doesn't know the other outstanding loan amounts, he could find himself assuming a lot more debt than he counted on.
To avoid surprises, the pros carefully research the properties, subscribing to fee-based foreclosure information services and conducting searches to ensure the title to the property is clear.
Krynen realized that she needed to be just as knowledgeable, so she went to the county recorder's office in Norwalk to review the property records on the Whittier house by hand.
"It's amazing what you can find there," she said.
Among other things, she discovered that the owners had defaulted on their mortgage years before but kept the house. But she also learned that the house had few other liens against it, making it appear to be an even better deal than she first thought.
As the day neared when the Whittier home would go up for auction, Krynen steeled herself for battle. She and her husband decided to take out a home equity line of credit so they would be able to produce a large check on auction day.
"I have a right to be standing next to a seasoned professional. My dollar is as good as his -- as long as I can get the last word," she said.
She never got the chance. A few days before the auction, Krynen called the trustee company and learned that the sale had been canceled. The owners had paid their debt.
Krynen was disappointed but not disheartened. She picked up some pointers about buying a house in foreclosure and is eager to test what she's learned. "I hope another opportunity comes up," she said.
