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.