Yes Virginia, There Will Be Foreclosures

From Carol Lloyd's column on SFGate.com

"In a boom market, people don't need to sell at a discount, even if they've hit hard times. They can always sell or refinance before losing their homes. This has been especially true in the Bay Area."

"Local companies like The Blue Sheet publish listings of auctions that take place on the steps of City Hall, the reality is that the great majority of these sales never take place."

"In the past, the world of buying on foreclosures has been controlled by a relatively small group of insiders -- professional investors who are disinclined to share their expertise and are sometimes downright cagey about the work they do."

"Now, however, companies like RealtyTrac are increasingly targeting regular homeowners and novice investors with nationwide, subscription-based property listings and educational materials. (In the past three years, the company has grown some 1,100 percent, earning it the No. 53 ranking in Inc.'s 500, a list of the nation's fastest-growing private companies.)"

"Welcome to Foreclosure Fiefdom, where one man's pain is another man's gain. Foreclosure sales are a dark and little understood corner of the market that involves buying a home or investment property either from an owner who cannot pay the mortgage or from a lender who has repossessed a property."

"Despite foreclosures remaining at historic lows, for the past few months default rates have begun rising -- in some places precipitously."

"In July 2006, 10,025 properties entered some stage of foreclosure in California, over 150 percent more than reported in July 2005. If trends continue, foreclosures may go from a tiny segment of the market to a substantial one, although even the experts are reluctant to guess just how substantial the shift will be."

"In July 2006, Colorado foreclosure rates led the nation for the fifth month in a row, with one new foreclosure filing for every 480 households. That month 3,810 properties entered some stage of foreclosure, which amounted to a 55 percent increase over July 2005."

"Experts agree that foreclosure rates will probably rise as more short-term fixed loans become adjustable."

'"There are certainly going to be more foreclosures," says Rick Sharga, vice president of marketing for RealtyTrac, a company that provides listings, training and data on foreclosures nationwide."

"Some foreclosure sales aren't terribly risky or complicated. When banks hire a real estate agent to sell a foreclosed property, these sales tend to be very similar to other real estate transactions. Public auctions, however, are a different story."

'"Auctions in particular are not for the first-time investor," Sharga concedes. "Especially if the person hasn't done their homework." Generally, buying at an auction means buying a home sight unseen, without inspections or disclosures. That means doing as much research about the property as possible, including ordering a title search to find out if there are other liens or loans."

'"Preforeclosure sales" (as they are known in the business) are typically less risky, but many regular home buyers may not have the stomach for them. They involve directly contacting people who are in the first stages of default -- having missed a mortgage payment for three or more months -- to ask them if they want to sell their home. This kind of real estate purchase has always seemed to me to be the most unethical because it directly preys on the homeowner's misfortune and vulnerability."

"But Sharga sees it differently. "People always talk about vultures circling the homeowner," says Sharga. "But in many cases this is a win-win situation. The buyers can get a home at below-market, the sellers can avoid foreclosure, which is a devastating experience, and the banks can avoid the costs of repossessing the property."'

"Indeed, as more people genuinely need to sell their homes to avoid foreclosure, it's arguably a more ethical decision to buy from them than from someone who is simply ready to cash out and move to Montana. But for homeowners living in a house they can no longer afford, that may be one morality tale they'd just as soon not have to hear."