You Can Buy a House
For $1,000 Today,
But You'll Pay a Price
Foreclosure-Auction Bargains
Often Need Costly Work;
Obscenities on the Wall
By JAMES R. HAGERTY
December 2, 2006
PITTSBURGH -- In an era when million-dollar houses are no longer exceptional, some homes sell for less than the price of a Brooks Brothers suit.
At an auction of foreclosed real estate here in April, Monte Lowderman struggled to entice someone to bid for a two-bedroom house in one of the city's roughest neighborhoods.
"Now, folks, I'm not telling you it's ready to move into," said the auctioneer. He paused, then added: "You know, the way to make money is recognizing potential."
Charles Lantzman, a real-estate investor here, didn't find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.
Nationwide, about 3,800 foreclosed homes sold for $1,000 or less in the first 10 months of this year, according to First American Real Estate Solutions, a data provider in Santa Ana, Calif.
Sales like these tend to occur in places like Detroit, Cleveland and Pittsburgh, where dying industry has left behind a surplus of what once was middle-class housing in neighborhoods now known for crime and bad schools.
More distressed homes are headed for the block. As the national housing boom fades, foreclosures are rising on subprime loans, those for people with weak credit records. A recent report from mortgage analysts at UBS AG in New York found that about 2% of subprime loans packaged into securities this year were in foreclosure by October, nearly double the year-earlier rate.
Foreclosed homes generally aren't a huge bargain. Savvy local investors know their value and compete to buy them. Still, as Mr. Lowderman noted, there is always the chance that one investor will spot potential where other bidders don't see any. And as lenders find themselves owning more foreclosed property, they become more eager to unload it as quickly as possible. The longer lenders hold these homes, the more they pay in taxes, insurance, lawn care and other maintenance.
In recent years, lenders and mortgage brokers have heavily promoted subprime loans. Many of the borrowers are people in poor neighborhoods who refinance their homes to take out cash or pay off credit-card debt.
The Pittsburgh house bought by Mr. Lantzman ended up at the auction because of one of those subprime refinancings that went bad. Allegheny County records show that CitiMortgage, a unit of Citigroup Inc., granted a $33,600 mortgage to the previous owner in February 2001, at an initial interest rate of 11.5%, which eventually would adjust twice a year, based on prevailing market rates, up to a maximum of 17.5%. In January 2002, the loan was sold to Household Finance, a unit of HSBC Holdings PLC. Household acquired the home through a foreclosure last year and put it on the block a few months later.
As is common in auctions, Household reserved the right to reject bids it deemed too low. A few days after the auction, Household asked Mr. Lantzman to consider raising his bid to $5,000 from $500. Mr. Lantzman sent back a list of problems he had spotted at the house, including damaged plumbing. As his trump card, Mr. Lantzman also mentioned a possible mold outbreak. (Banks hate owning houses with mold, he explains: "They don't want to hear about that.") He told Household his final offer was $700. Household accepted. Mr. Lantzman paid an additional $3,000 or so in auction fees and other transaction costs.
Citigroup and HSBC, Household's parent, both declined to comment on the case, citing customer privacy.
Busy with his day job as the owner of a small construction company, Mr. Lantzman didn't inspect his $700 house again for several months. Finally, one afternoon in August, he parked his sport-utility vehicle on Olivant Street in front of the narrow, two-story house with light-blue siding. The windows and doors of several houses on the street were boarded up. Mr. Lantzman walked warily around his house and noted signs of minor fire damage on one side. He discovered that the back door had been broken open. Shards of glass lay on soggy carpeting in the entryway. "Probably turned into a crack house," he muttered.
Once he began examining the inside with a flashlight, though, Mr. Lantzman was relieved. There were no signs of squatters.
"It actually doesn't look as bad as I thought," he said. He expects to spend $5,000 to $10,000 on renovations. Then he believes he will be able to rent the place for around $600 a month. Eventually, Mr. Lantzman hopes, the neighborhood will recover and house prices will increase.
At an auction in January, Jesse L. Thompson paid $1,000 for a three-bedroom house on East 97th Street in Cleveland. The house, white with mint-green trim, has been sold a dozen times since 1980, and lenders have foreclosed on it three times in that period, according to public records compiled by RealQuest, a unit of First American Corp. Mr. Thompson, who has been investing in real estate for more than 30 years, says the house needed replacements for a hot-water tank, heating ducts and water pipes stolen from the building during the latest foreclosure. After spending about $8,000 on repairs and redecoration, Mr. Thompson found a tenant to pay $550 a month.
It hasn't been easy, though. Shortly after Mr. Thompson bought the house, vandals broke in, spray-painted obscenities on the walls and sliced through electrical wires.
Mary Krawiec isn't impressed by $1,000 home purchases. Eight years ago, she bought a Victorian boarding house in Troy, N.Y., for $10.
The previous owners of the house had a $98,500 mortgage from KeyBank, a unit of KeyCorp, Cleveland. KeyBank foreclosed on the house in late 1996. At the time, an appraiser estimated the value of the house and lot at $52,000. The foreclosure led to an auction of the property, held by a court-appointed referee in the lobby of the Rensselaer County courthouse in Troy. At an initial auction in October 1997, no one bid for the house.
The referee, Richard T. Morrissey, held a second auction in November 1998. Ms. Krawiec says several other people attended, but she was the only one who showed any interest in bidding. Her opening offer was $1. She says the referee gave her a sour look. She raised her bid to $10 and held firm. The referee gave her title to the home in exchange for a $10 bill.
Ms. Krawiec acquired the house free of any liens from lenders or others but did have to pay an overdue water bill of about $2,000.
Usually, when bids at a courthouse foreclosure sale are far below the property's appraised value, a representative of the lender bids enough to purchase the home and then seeks to resell it later at market value. In this case, KeyBank made no attempt to acquire the house. Justin Heller, an Albany, N.Y., lawyer who represented KeyBank in the foreclosure, says he believes the bank decided that costs of renovating the house to make it salable might exceed its market value. A KeyBank spokeswoman declined to comment.
The boxy three-story house, in a middle-class neighborhood a few hundred yards from the Hudson River, is sheathed in pale yellow aluminum siding. Inside, years of neglect have left their mark, including a bowed stairway wall, crumbling plaster and a leaky skylight. Ms. Krawiec and her husband, Mark Peabody, are renovating the building's nine apartments. They estimate the total cost of fixing up the $10 house will be $65,000.
Ms. Krawiec and Mr. Peabody, a carpenter, do all the renovation work themselves. "I bought her a nail gun once for Christmas," Mr. Peabody says.
For now, the $10 house has three tenants, producing rental income of nearly $15,000 a year. Once all nine apartments are renovated, Mr. Peabody estimates, the house will yield rental income of $50,000 a year.
For $1,000 Today,
But You'll Pay a Price
Foreclosure-Auction Bargains
Often Need Costly Work;
Obscenities on the Wall
By JAMES R. HAGERTY
December 2, 2006
PITTSBURGH -- In an era when million-dollar houses are no longer exceptional, some homes sell for less than the price of a Brooks Brothers suit.
At an auction of foreclosed real estate here in April, Monte Lowderman struggled to entice someone to bid for a two-bedroom house in one of the city's roughest neighborhoods.
"Now, folks, I'm not telling you it's ready to move into," said the auctioneer. He paused, then added: "You know, the way to make money is recognizing potential."
Charles Lantzman, a real-estate investor here, didn't find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.
Nationwide, about 3,800 foreclosed homes sold for $1,000 or less in the first 10 months of this year, according to First American Real Estate Solutions, a data provider in Santa Ana, Calif.
Sales like these tend to occur in places like Detroit, Cleveland and Pittsburgh, where dying industry has left behind a surplus of what once was middle-class housing in neighborhoods now known for crime and bad schools.
More distressed homes are headed for the block. As the national housing boom fades, foreclosures are rising on subprime loans, those for people with weak credit records. A recent report from mortgage analysts at UBS AG in New York found that about 2% of subprime loans packaged into securities this year were in foreclosure by October, nearly double the year-earlier rate.
Foreclosed homes generally aren't a huge bargain. Savvy local investors know their value and compete to buy them. Still, as Mr. Lowderman noted, there is always the chance that one investor will spot potential where other bidders don't see any. And as lenders find themselves owning more foreclosed property, they become more eager to unload it as quickly as possible. The longer lenders hold these homes, the more they pay in taxes, insurance, lawn care and other maintenance.
In recent years, lenders and mortgage brokers have heavily promoted subprime loans. Many of the borrowers are people in poor neighborhoods who refinance their homes to take out cash or pay off credit-card debt.
The Pittsburgh house bought by Mr. Lantzman ended up at the auction because of one of those subprime refinancings that went bad. Allegheny County records show that CitiMortgage, a unit of Citigroup Inc., granted a $33,600 mortgage to the previous owner in February 2001, at an initial interest rate of 11.5%, which eventually would adjust twice a year, based on prevailing market rates, up to a maximum of 17.5%. In January 2002, the loan was sold to Household Finance, a unit of HSBC Holdings PLC. Household acquired the home through a foreclosure last year and put it on the block a few months later.
As is common in auctions, Household reserved the right to reject bids it deemed too low. A few days after the auction, Household asked Mr. Lantzman to consider raising his bid to $5,000 from $500. Mr. Lantzman sent back a list of problems he had spotted at the house, including damaged plumbing. As his trump card, Mr. Lantzman also mentioned a possible mold outbreak. (Banks hate owning houses with mold, he explains: "They don't want to hear about that.") He told Household his final offer was $700. Household accepted. Mr. Lantzman paid an additional $3,000 or so in auction fees and other transaction costs.
Citigroup and HSBC, Household's parent, both declined to comment on the case, citing customer privacy.
Busy with his day job as the owner of a small construction company, Mr. Lantzman didn't inspect his $700 house again for several months. Finally, one afternoon in August, he parked his sport-utility vehicle on Olivant Street in front of the narrow, two-story house with light-blue siding. The windows and doors of several houses on the street were boarded up. Mr. Lantzman walked warily around his house and noted signs of minor fire damage on one side. He discovered that the back door had been broken open. Shards of glass lay on soggy carpeting in the entryway. "Probably turned into a crack house," he muttered.
Once he began examining the inside with a flashlight, though, Mr. Lantzman was relieved. There were no signs of squatters.
"It actually doesn't look as bad as I thought," he said. He expects to spend $5,000 to $10,000 on renovations. Then he believes he will be able to rent the place for around $600 a month. Eventually, Mr. Lantzman hopes, the neighborhood will recover and house prices will increase.
At an auction in January, Jesse L. Thompson paid $1,000 for a three-bedroom house on East 97th Street in Cleveland. The house, white with mint-green trim, has been sold a dozen times since 1980, and lenders have foreclosed on it three times in that period, according to public records compiled by RealQuest, a unit of First American Corp. Mr. Thompson, who has been investing in real estate for more than 30 years, says the house needed replacements for a hot-water tank, heating ducts and water pipes stolen from the building during the latest foreclosure. After spending about $8,000 on repairs and redecoration, Mr. Thompson found a tenant to pay $550 a month.
It hasn't been easy, though. Shortly after Mr. Thompson bought the house, vandals broke in, spray-painted obscenities on the walls and sliced through electrical wires.
Mary Krawiec isn't impressed by $1,000 home purchases. Eight years ago, she bought a Victorian boarding house in Troy, N.Y., for $10.
The previous owners of the house had a $98,500 mortgage from KeyBank, a unit of KeyCorp, Cleveland. KeyBank foreclosed on the house in late 1996. At the time, an appraiser estimated the value of the house and lot at $52,000. The foreclosure led to an auction of the property, held by a court-appointed referee in the lobby of the Rensselaer County courthouse in Troy. At an initial auction in October 1997, no one bid for the house.
The referee, Richard T. Morrissey, held a second auction in November 1998. Ms. Krawiec says several other people attended, but she was the only one who showed any interest in bidding. Her opening offer was $1. She says the referee gave her a sour look. She raised her bid to $10 and held firm. The referee gave her title to the home in exchange for a $10 bill.
Ms. Krawiec acquired the house free of any liens from lenders or others but did have to pay an overdue water bill of about $2,000.
Usually, when bids at a courthouse foreclosure sale are far below the property's appraised value, a representative of the lender bids enough to purchase the home and then seeks to resell it later at market value. In this case, KeyBank made no attempt to acquire the house. Justin Heller, an Albany, N.Y., lawyer who represented KeyBank in the foreclosure, says he believes the bank decided that costs of renovating the house to make it salable might exceed its market value. A KeyBank spokeswoman declined to comment.
The boxy three-story house, in a middle-class neighborhood a few hundred yards from the Hudson River, is sheathed in pale yellow aluminum siding. Inside, years of neglect have left their mark, including a bowed stairway wall, crumbling plaster and a leaky skylight. Ms. Krawiec and her husband, Mark Peabody, are renovating the building's nine apartments. They estimate the total cost of fixing up the $10 house will be $65,000.
Ms. Krawiec and Mr. Peabody, a carpenter, do all the renovation work themselves. "I bought her a nail gun once for Christmas," Mr. Peabody says.
For now, the $10 house has three tenants, producing rental income of nearly $15,000 a year. Once all nine apartments are renovated, Mr. Peabody estimates, the house will yield rental income of $50,000 a year.
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