FORECLOSURE FLIPPING: SONOMA COUNTY REAL ESTATE CRISIS PROVES LUCRATIVE FOR INVESTORS WHO BUY DISTRESSED HOMES AT AUCTION, RESELL FOR SIZEABLE PROFIT

Flipping homes, where an investor buys a house, makes some improvements, and then quickly resells it for a big gain, might seem like a relic of the real estate boom.

But it has again become big business.

Real estate investors are buying homes at foreclosure auctions from banks and then reselling the properties within months or even weeks for large gains -- often reaping bigger profits than speculators enjoyed during the heyday of the real estate run-up in the first half of the decade.

The lucrative business has attracted local players such as Hank Trione, a member of one of the county's wealthiest families, and Chris Peterson, a prominent home builder who teamed up with investors to launch a house flipping business in 2009 that now spans Northern California.

The financial returns can be eye-popping. One investor purchased a Santa Rosa home at auction for $153,575 and sold it 30 days later for $330,000 -- a 115 percent markup.

Those payoffs have allowed a handful of investors

to generate tens of millions of dollars in profits, according to a Press Democrat analysis of the nearly 700 Sonoma County homes sold to investors at auctions in a nearly three-year span.

About one in every 10 homes foreclosed in Sonoma County was sold at auction to a third-party investor such as Peterson, according to foreclosure records provided by MDA DataQuick of San Diego.

The Press Democrat conducted an analysis of all 6,463 properties that went to auction in the county between January 2008 and October of this year. Nearly 700 were sold to third-party investors, and the rest were seized by lenders.

Investors on average paid $236,000 for homes sold at auctions, and were able to resell the properties about three months later for an average of $330,000 -- a markup of $94,000 or 40 percent.

But the profits flowing to real estate investors have come at a cost, and stirred up resentment among former homeowners who allege wrongful foreclosures by banks and unethical behavior by flippers.

Some former homeowners say lenders misled them into believing they would receive a home loan modification, only to discover their property had been sold at auction to an investor.

Others complain they were bullied and pressured into quickly leaving their homes by investors who bought at auction and wanted to sell quickly. One woman said a flipper drilled out the locks of her Santa Rosa home and then dumped her possessions on the driveway.

The result has been dozens of lawsuits in Sonoma County -- either because an angry homeowner refuses to leave or because they file a civil suit against the bank in an attempt to reclaim the property.

Many real estate investors said they sympathize with the families, but also say this process must occur if the housing market is to recover. Many borrowers who lost their homes in foreclosure proceedings took out loans they could not afford and now new families must be found to move in, Peterson said.

"I don't think they're victims," he said.

Auction buyers like Peterson point to the benefits of their work, including rehabbing dilapidated homes, employing construction workers who lost jobs when the housing market tanked, and helping the real estate market begin to recover by finding new owners for the glut of foreclosed homes.

Yet none of those benefits eases the pain for families losing their homes to foreclosure.

Caught off guard

Greg and Tracy Maples expected the paperwork for their home loan modification to arrive any day.

"I got a call from my wife," Greg Maples said. "She was crying, just crying. Someone had taped a three-day eviction notice on our door."

Their house in Windsor, which the couple had purchased 14 years earlier, had been sold at foreclosure auction to Chris Peterson.

"We were totally caught off guard," Maples said. "(The lender) had told us to stop making payments so they could modify our loan. They kept talking about Obama's new plan."

But rather than modifying the couple's loan, the Texas company, Litton Loan Servicing, had continued to move ahead with the foreclosure process.

Litton Loan Servicing, which manages loans for Goldman Sachs, did not return calls seeking comment.

In November 2008, the Maples received a notice of default, the first step in California's foreclosure process.

Three months later they received a notice of trustee's sale, which meant their home was scheduled for auction within about a month. So the couple contacted the loan servicer again.

"They said 'Don't worry about it. You're in the modification process,'" Maples said.

The auction was held about a month later at the county administration building in Santa Rosa, where investors lined up with cash in hand to bid on properties. The lender set a minimum bid on the Maples' home. If no one paid that amount, then the house would become the bank's property.

Peterson's company bought the home at the auction for $231,000. That low amount flabbergasted Maples.

"Wow. I could easily have paid the mortgage on a $300,000 loan," he said. "Why didn't they give that deal to me?"

Like many homeowners, Maples was outraged to learn that rather than modifying his loan, the lender had sold his home for far less than he was willing to pay, had the bank given him a chance. The lender lost money, and Greg and Tracy Maples were forced to leave the only home their four children had ever known.

Peterson said he understands the frustration of people who defaulted on their loans, and his company frequently offers people incentives to move out within a set time.

"We understand it is an extremely emotional time," he said. "It's not a pleasant process."

His company paid the Maples several thousand dollars to move out within two weeks. Peterson doesn't dispute that Maples was likely led to believe he was receiving a home loan modification, and didn't know his home was being sold at auction.

"The servicers have done a very poor job in our opinion," Peterson said.

Peterson found a buyer for the home 41 days after the auction, selling it for $380,000 -- a markup of 64 percent.

In a letter to his investors around that time, Peterson said that in his 30-year career as a real estate professional he had never seen a better opportunity to buy properties so cheaply and quickly resell them for so much more.

"I firmly believe that this is the opportunity of a lifetime for real estate investors," he said.

Auction market heats up

The auction market took off in 2008, shortly after the foreclosure crisis began, according to an analysis by The Press Democrat of more than 6,400 auctions over the last three years. The rate of auction sales to third parties had doubled by the end of 2008, and by mid 2009 it had doubled again.

The spike in sales occurred at a time when lenders began steeply reducing the minimum bids set at auction, and bank officials began publicly acknowledging they were accepting prices far below the outstanding loan balance.

In early 2009, Chris Peterson partnered with Brian Burke, a former police officer turned real estate agent who has been investing at foreclosure auctions for more than 15 years. They began soliciting money from investors, as well as using their own cash to scoop up properties.

During the real estate boom years, Peterson was one of the top home builders in the Bay Area and his mortgage company originated more than $215 million in loans in 2005, according to the company.

He sold his mortgage company at the peak of the market, and then put his construction company, Rivendale Homes, on hiatus when the real estate market imploded.

"The opportunities change rapidly, and you have to move quickly," Peterson said.

Their new model was simple: Buy, rehab, sell.

They spend anywhere between $10,000 to $40,000 fixing up a house on average before putting it on the market, Burke said. Their costs also include administration expenses, broker fees and any money needed to pay off former homeowners.

The partnership bought its first property in Sonoma County in March 2009. Its second purchase was the Maples' home 11 days later.

Their business boomed, and they became the largest auction buyers in Sonoma County and expanded their operation across Northern California.

Their company -- recently re-named Praxis Capital -- has bought more than 180 auction properties across Sonoma, Solano, Sacramento and Placer counties and employs 22 full-time workers, Peterson said.

Complaints of bullying

Auction buyers want to flip homes as quickly as possible, because it allows them to move on to the next project and resell more homes per year.

That desire to turn a higher profit has left some former homeowners complaining they were bullied by investors who bought their homes at auction.

Esther Lo-Ferroni said an investor who purchased her house at a foreclosure auction broke her locks and dumped her belongings on the driveway to pressure her to leave sooner.

Her Petaluma home was bought by Michael Cantarutti, a Santa Rosa divorce attorney who purchased 34 homes at auction and has been the subject of multiple complaints reported to The Press Democrat.

"He was horrible," Lo-Ferroni said.

The same day he bought her home, Cantarutti drove to her house to deliver the three-day eviction notice. Because Lo-Ferroni was not home, he handed it to her 13-year-old daughter, Lo-Ferroni said.

"She called me in tears. It was awful," she said.

Lo-Ferroni said she had thought she was in line to receive a home loan modification, and had been told by her lender to disregard the notice of trustee's sale, she said.

When she asked Cantarutti for more time, he said no, according to Lo-Ferroni.

"He had absolutely no emotion. No nothing," Lo-Ferroni said "He just said get out."

Cantarutti did not return calls seeking comment. But he has previously defended his actions.

"I'm just doing my job. Just like a police officer who goes to a residence to break up a domestic dispute," he told The Press Democrat in July.

Cantarutti said at the time that he frequently drove out to people's homes and posted the three-day eviction notices immediately after purchasing homes at auction. He also did it for James Madison, one of the county's largest real estate brokers who also buys homes at auction.

Cantarutti is being sued by a Santa Rosa family who said he illegally forced them out only days after he purchased their home in July.

John and Traci Figueroa filed a lawsuit in September, alleging Cantarutti trespassed, wrongfully ejected them from their home, and intentionally inflicted emotional distress on the couple and their two sons. The couple also alleges Bank of America sold their house at auction at a time when federal regulations prevented the sale due to their application for a home loan modification.

The couple is seeking damages and to have the home returned to them.

Their Santa Rosa attorney, Tom Kelly, declined comment for this story. Kelly also represents another client who is suing GMAC and Peterson's company to have his home returned after it was sold at auction.

Madison said he has stopped working with Cantarutti, and said he did not know the attorney's license is currently suspended.

Cantarutti's license to practice law has been suspended three times by the California State Bar for malpractice as a result of mistreating clients or for inappropriately approaching someone else's client.

"My reputation is important to me," he said. "That's why we are not partners anymore."

How prices are set

Some investors also have close ties to lenders.

Banks and loan servicers turn to real estate professionals to help determine a property's value. The companies use this information to determine whether to provide a family a home loan modification. The information is also used to price homes at auctions.

Madison frequently provides banks with this information, known in the industry as a "broker price opinion," or BPO. Lenders pay about $50 for each one.

"We do it all the time for banks and people who work for them," Madison said this summer in an interview with The Press Democrat. "It helps them figure out if we should keep negotiating (with the homeowner) or go to sale."

Former real estate agent Sherry Dove, whose home went to auction after she fell behind on payments, said she was stunned to learn Madison bid and won her home.

"It's like (Madison) is playing both sides of the table," she said. "It doesn't seem right."

Madison said in an interview last week that he does not believe it is a conflict of interest to participate in setting a home's price for auction and then bid on the home.

"I would never base my BPO on a silly low value because eventually (the banks) would fire me," he said. "It's the bank's choice to lower these bids."

He said he did not know if he has ever bid on a home where he also provided a price opinion.

A boon for builders

The opportunity to flip properties has provided a lifeline for construction companies leveled by the recession.

"Construction was getting so slow, you couldn't make any money," said Don Bickel, who for years ran Bickel Construction in Santa Rosa. "So I decided to create my own job."

In early 2009 he began buying properties at auction. He purchased a partially built, 3,000-square-foot house in Santa Rosa.

It likely would have sat half finished, exposed to the elements, if Bickel hadn't purchased it, he said.

Marvin De Angelis is another Santa Rosa builder who turned to auctions to keep himself and his crew employed.

"I'm keeping three to four guys busy," he said. "If it wasn't for that they wouldn't be working."

De Angelis said he "feels sick" about all the people losing their homes, but the best business was at the auction market.

"It's become a cottage industry," he said.

De Angelis and others said the market has slowed over the past few months as banks have curtailed foreclosure proceedings due to government scrutiny and have stopped offering cut-rate deals at auction.

Anger lingers

The flipping business has left some displaced homeowners such as Greg and Tracy Maples angry with the system, even though their situation has improved.

The couple moved into a rental house not far from their old one.

"Frankly, it's a better house," Greg Maples said.

He pays $1,800 in rent, versus the $3,600 mortgage he was paying after his adjustable interest rate climbed in 2008.

He acknowledged he is at fault for not being prepared for an economic collapse, and not better understanding how quickly his interest rate would increase.

But he can't shake his resentment at the lender who was willing to loan him the money, but not work with him once he got into trouble, or with Peterson's company, who was there to profit at his expense.

"It was predatory," Maples said.

Peterson understands people's hard feelings, but said it is unwarranted.

"We're playing our part in the recovery," he said. "It's not painless, but this is part of the healing process."

Researchers Teresa Meikle and Janet Balicki contributed to this report. You can reach Staff Writer Nathan Halverson at 703-1577 or nathan.halverson@pressdemocrat.com.

Photos by CHRISTOPHER CHUNG / The Press Democrat