Saturday, April 08, 2006

Foreclosure Auctions In New York

The New York Times looks at the perils of foreclosure auctions. "Buying real estate at foreclosure auctions is an alluring idea, particularly in New York where nearly everyone is scrambling for a deal. Foreclosure auctions, which occur after a lender or government agency forecloses on a parcel, building or apartment, are a judicial process in New York, meaning that they are run by the court system."

"Yet while there is a tantalizing possibility of getting a deal, people who are intimately familiar with foreclosure auctions in New York, lawyers, mortgage bankers, brokers and former auction regulars, advise steering clear of them. 'You really have sharks at these sales,' said Bruce Bronster. His litigation group has handled more than 3,000 foreclosures. 'You're a guppy. And you're going up against very seasoned and sophisticated guys.'"

"Auction regulars tend to be investors who pool their money and have ties to the construction business. They know the market, they do their research, and they have the capital and the ability to renovate properties sold 'as is.' That is a significant advantage because foreclosed properties are frequently in disrepair and the interiors can rarely be inspected before bidding. Even worse, there can be title disputes."

"Yet despite the pitfalls of foreclosure auctions, people do make money from them. Many people attempt to play by their own rules. Some try to buy not only at auction but also during the pre-foreclosure period, before a property goes to auction, by calling the owner directly. Isaac Hager, a developer, has bought several buildings at foreclosure auctions. He has his own renovation and construction teams and does so much research that he has managed to buy mortgages from banks before properties went to auction. 'It's not easy at all,' Mr. Hager said."

"Before any foreclosure auction in New York, the terms of sale and the address of the property must be published once a week for four weeks in local periodicals. So while you cannot usually get inside, you can get the address and view the exterior."

"Auctions generally take place at New York City's county courthouses. Some 70 percent of the city's foreclosure auctions occur in Brooklyn and Queens. So if you have your heart set on buying in Manhattan, you will have even less to choose from. Likewise if you want a co-op. While co-ops can be auctioned, they do not go through the courts because they are not considered 'real property' (you own shares in the apartment corporation, not the unit itself)."

"Some experts recommend bringing certified checks in various amounts ($10,000, $5,000, $1,000) to meet the 10 percent down payment because you do not know exactly how much you will end up paying. Others prefer to bring one certified check, at an amount they have decided on well before the auction, because it prevents them from overbidding."

"It is also important to do a financial projection to make sure that the discount you are getting by buying at auction is substantial enough to make the risk worthwhile. 'You have to know what liens are on the property so you know how much you're going to have to spend,' Jon Felice said. 'My gut tells me that you're buying at a discount in most instances of 30 to 40 percent.'"

"The advantage for those who want to buy a home instead of an investment property, though, is that if you are satisfied with buying at only 10 percent below the market rate, you may be in luck because investors are looking for bigger returns. Still, many foreclosures end up being bought at auction by the bank that holds the mortgage. These properties are known as real-estate-owned, and banks put them on the market for more than they paid at auction."

"Jessica Davis recommends that amateurs observe at least three auctions before bidding. 'There is no reason anyone should have an unhappy auction story if they have done their homework,' she said."


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