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TESS VIGELAND: We talked earlier in the show about the renewal of bidding wars on houses in California. In the Phoenix area, more than 4,000 homes are sold at auction each month. Investors buy foreclosed properties at basement prices and then flip them. But if you want to get in on the game, caveat emptor.
From KJZZ, Peter O’Dowd reports.
Peter O’Dowd: Every weekday on the steps of the Maricopa County Courthouse, experienced investors gather around fast-talking auctioneers.
Auctioneer 1: …Fidelity 090101371-3, currently located at 710…
If you’re new to the world of foreclosure auctions, here are a couple of things you need to know: Banks hire a trustee to manage the sale of delinquent property. In Arizona, that trustee must publicly publish an opening bid on each property the morning before the auction. That means you, me, or an investor like this guy…
Auctioneer: Patrick Bush!
…Can research the house ahead of time and decide just how much we’re willing to bid. And if you’re really good at this, you’ll have a tip sheet that shows how much is owed on the property, and whether the sale will be bogged down with a second mortgage. But even a professional investor can find himself at a disadvantage at these courthouse auctions, because something fishy has been happening lately. Some trustees slash their asking price within hours of the auction.
Tom Ruff: It gives the appearance of impropriety.
Tom Ruff spends his work day tracking housing data, looking for these so-called “drop bids.” As an example of how drop bids benefit a professional investor, he pulls up a four-bedroom house on his computer. The property’s opening sale price was around $174,000, but sometime before the auction…
Ruff: The bid was dropped from $174,907 to $55,000.
OK, that might sound like an irresistible deal, but there’s no way that you, the casual buyer, will ever know about it. Even professional investors wouldn’t have a clue, unless they got the inside scoop, which is probably why only one person was around to bid on that $55,000 house in the first place. Ruff says that investor, by the way, flipped the house a month later and made an $80,000 profit.
Ruff: When you’re looking for impropriety, always follow the money. And there’s a lot of money in foreclosures right now.
Since June, Ruff has counted 1,200 drop bids in Arizona. If you want to get the inside track on those deals, it helps to know a guy like Brad Kelly. His company constantly compiles data for clients who make a living at these auctions. The moment he sees a drop bid, Kelly can send an e-mail blast to those investors.
Brad Kelly: Here’s the thing, the data is public for everybody. You just have to know where to get it. If somebody wants to call that unfair, well, I guess they could call that unfair. But we don’t think it is.
Whether these bids are unfair is up for debate. But why are they happening in the first place? Tom Ruff says almost all the drop bids in Arizona come from California trustees.
Ward Hanigan is a former California investor who now trains people to buy distressed property at auction. He says drop bids started showing up there a few years ago.
Ward Hanigan: But only sporadically. Now, it’s like crazy.
When I asked Hanigan why he echoed the concern many others share — that big trustees are working sweetheart deals with the information. But Rande Johnsen says that’s just untrue. He’s the president of the United Trustees Association in California, and he says there’s nothing devious about drop bids at all.
Rande Johnsen: There’s just sheer volume. We’re dealing with, not a few hundred foreclosures; we’re dealing with thousands of foreclosures. Things are changing fairly quick out there.
Johnsen says banks are working right up until the final moments of the auction. Loans get modified, people file for bankruptcy, sale prices need to be adjusted. And all that’s hard to do in a timely fashion as the banks scramble to clear their books of millions of delinquent properties.
Auctioneer 3: If you’re not signed in, you cannot bid with us!
But what if those time management problems trickle down to you, the casual buyer? In this market its not uncommon to see investors like Christine and John Augustine gathered in front of the county courthouse. They’ve never been to an auction.
Christine Augustine: We’ll either come back one property richer, or wiser. Probably wiser.
John Augustine: There’s probably inside information, there’s probably a lot of, if you know what you’re doing, it’s a little easier to get it done.
Christine Augustine says that if an investor here knows something she doesn’t about the property she wants, she’s simply outgunned. And since she’s never heard of drop bids, chances are she’s already at a disadvantage.
In Phoenix, I’m Peter O’Dowd for Marketplace Money.
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