The Myth of The Foreclosure Auction Bargain

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SANTA MONICA -- Thinking you might snatch a foreclosed house at auction for a real bargain? Think again, advises Sean O’Toole, founder of www.foreclosureradar.com.

O’Toole notes that the number of foreclosed Califiornia homes being auctioned off is skyrocketing. ‘We went from 1,400 foreclosures sold at auction in September to 5,300 in March,’ he told me.

But here’s the catch: ‘One caveat right now, in March we had 90 percent of these properties returning to the lender. So we haven’t really established what a third party would pay for these properties.’

Returning to the lender? Huh?

If you are confused, so was I. Then O’Toole explained how these things generally work. Say the homeowner owed $400,000 on the home, but can’t pay the mortgage and the house goes into foreclosure. The lender takes back possession and auctions the house. But in the current market, most lenders are accepting only bids of $400,000 or more. They can accept lower, but in the current market lenders are holding out, and holding on to the house a little longer.

Instead of selling at auction, O’Toole continued, lenders are hiring brokers who specialize in distressed properties -- known as REO brokers -- who will evict the borrowers, clean up the property, list it, and try to get the best price for it. (Why ‘REO’ brokers? Because banks list these kind of foreclosed houses on their balance sheets as Real Estate, Owned -- REO.)

So how is the REO brokerage business these days? Good question, which is why I’m meeting an REO broker for coffee tomorrow in Encino. Look for that item on LaLand tomorrow.

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