Foreclosure Auctions, Sweet Deals?

Do you live close or invest in Stockton, California?

Twice a day, would-be real estate moguls gather on the local courthouse steps for the latest can't-miss opportunity in California's land rush: the foreclosure auction.

Beneath the shade of a magnolia tree, veterans and "newbies" crowd around auctioneer Gary Oberdalhoff as he lists a property whose owners couldn't pay the mortgage, one of thousands to go on the block in this sprawling, arid region 50 miles east of Los Angeles.

"Do I have any opening bids?" Oberdalhoff asks. Several step forward to show him cashier's checks worth hundreds of thousands of dollars, and the bidding begins.

It might be a scene straight out of the Great Depression, if you ignore the Bluetooth wireless headsets.

A record level of home foreclosures has hit the U.S. housing sector after years of reckless lending to risky borrowers. To those on the courthouse steps, that spells opportunity. Unlike during the Great Depression, investors are still eager to enter the market.

"A lot of people's misery is other people's gains," says investor Bryon Bettencourt. "It's just the way of the world, dog eat dog."

As the nation's real-estate boom curdles, speculators who a year ago might have camped out in front of new housing developments are now hoping to find a bargain among the thousands of houses emptied by foreclosure.

But veterans say true bargains are becoming harder to find as the number of homes on the auction block swells.

Few places have felt the impact of the slowing market more than this fast-growing region known as the Inland Empire of Southern California.

Starting in the 1970s, the Inland Empire's orange groves gave way to subdivisions as families migrated from the coast in search of relatively affordable housing.

As property values marched higher over the past decade, homeowners refinanced their mortgages to pay for vacations and new cars. Thanks to risk-tolerant "subprime" lenders, people with a history of bankruptcy and maxed-out credit cards were able to enter the housing market with loans charging higher rates for borrowers with lower credit quality.

But many of these new homeowners couldn't afford their mortgages, or fell behind when their adjustable monthly payments shot up. Two years ago, they might have been able to sell the house for a healthy profit. But that's not an option now that prices have stopped rising.

After three months of missed mortgage payments, homeowners receive a default notice. Three months after that, the bank can repossess the house and auction it off to pay off the loan.

Foreclosure and default filings in the region quadrupled from February 2006 to February 2007, according to research firm First American LoanPerformance. Nationwide, they increased 12 percent to record levels during that period.

During the first three months of the year, 1 in 68 houses in the Inland Empire was in default or foreclosure, a rate surpassed only by Detroit and Las Vegas, according to research firm RealtyTrac.

'GROUND ZERO'

"This is ground zero; this is where it's all happening," says Juan Cruz, whose urban-cool ski hat and baggy jeans contrast with the golf shirts and running shoes favored by the other speculators.

Cruz has his eye on a four-bedroom house in nearby Corona offered at $131,000. That figure represents the unpaid balance on the previous homeowner's foreclosed mortgage. At that price, Cruz thinks he can turn the house around for a nice profit even if it requires some work. Like the other bidders, Cruz has never seen the inside.

When the bidding starts, Cruz has plenty of competition. The speculators bid steadily in hundred-dollar increments with cell phones pressed to their ears, keeping their bosses up to date on the action.

Twenty minutes later the house is sold to a heavyset man for $286,000.

That's less than it would have fetched last year. But veteran home buyers have grown more cautious as the market has cooled.

More houses are on the market now than at any time in the past eight years, according to the Multi-Region Multiple Listing Service database. At the current pace it would take more than 13 months to sell them all, compared with 7 months at this time last year.

Bargains are scarce on the auction block these days. Houses purchased in the last two years are often saddled with steep mortgages that can exceed the house's market value.

Sales are down from last year and prices have risen less than 1 percent, according to DataQuick Information Systems.

"Now your house has to be underpriced and spectacular to sell," says foreclosure investor David Schultheiss.

Today's auction is an exception, as all three houses offered find eager buyers. At an auction in Corona the previous afternoon, only one house out of 13 sold -- for a penny more than its asking price. That's typical, say those involved.

The banks set as the starting price the amount left on the mortgage. If the mortgage is higher than the home value, which it often is, investors will not bid. Banks are then forced to sell later, likely at a loss.

NEWBIES

Ironically, new investors are piling into the market as bargains become harder to find.

Good times may come and go, but get-rich-quick dreams spring eternal. Promoters tout the fortunes to be made in the foreclosure market at seminars and workshops across Southern California.

"There's literally never been a better time to get into investing in foreclosures!" promises a full-page ad in the Los Angeles Times. "Could you use an extra $10,000 this month?"

Because state law requires foreclosed homes to be auctioned to the public, new investors are theoretically on an equal footing with banks and other institutional investors. But they're going up against veterans who have been in the game since the last bust, in the early 1990s.

A pair of inexperienced, eager investors draw smirks when they bid up a house to $361,000.

"She's toast, dude. You won't see her in three months," says veteran investor William Honens, who says the buyers will be lucky to break even.

The auction winners, Coc Vu and Alan Ford, say they're thrilled with their purchase. They plan to put it back on the market immediately.

"Now we want to drive by and see our house," Vu says.

Before she got into foreclosure investing, Vu went door to door asking homeowners if they wanted to to sell. That could draw an angry response.

On the courthouse steps, she doesn't have to worry about anyone slamming the door in her face. The former owners have usually moved out, and they don't show up at the auction.

Their dreams and struggles are reduced to a sheaf of filings at the county clerk's office two blocks away.

PAPER TRAIL

Take 870 Zeppelin Court, a house in the rapidly developing farm town of San Jacinto that fetched $250,000 at auction.

The former owner bought the house with a pair of subprime mortgages in March 2004. Both featured adjustable rates that could increase after two years. She took out a third loan in July 2005.

Her first default notice arrived in January.

Manure perfumes the air in San Jacinto, 30 miles east of Riverside. The mountains are closer here, less obscured by smog.

The house at 870 Zeppelin Court turns out to be a pink stucco bungalow with a sickly palm tree out front. Pigeon droppings litter the stoop.

Neighbor Carlos Hernandez, an airplane mechanic, says the house has sat vacant for eight months. He's eager to hear if anybody is moving into a neighborhood where sellers have out numbered buyers.

"She tried to sell it," he says of his neighbor. "No bites."

2007 Foreclosure Search