Unfazed investors shell out cash for distressed properties

The hang-up over so-called foreclosure "robo-signers" is definitely cause for concern, but it hasn't stopped investors from sinking their cash into low-priced Las Vegas homes that throw off a relatively high rate of return, real estate sources said.

Major lenders such as Bank of America, GMAC and JP Morgan Chase halted the foreclosure process in 23 states after illegalities were found in documentation paperwork, thereby "clouding" ownership titles for homes taken back by the banks.

It hasn't yet become a major factor in nonjudicial foreclosure states such as Nevada, where banks do not need court approval to foreclose on delinquent borrowers. Bank of America, the largest mortgage lender, extended the moratorium to all 50 states amid concern by federal and state officials that homes are being seized based on faulty information.

Las Vegas real estate investor Kevin Kelly doesn't see it as an issue. He's been buying single-family homes during the past year at trustee sales for $80,000 to $150,000, holding them and reselling for a profit.

"When we buy at trustee sales, we've seen two of those where the previous owner sits in the property with no plans to move out because they have a court case," he said.

One owner did eventually vacate the property, while the other gave Kelly the phone number of his attorney who didn't return calls.

"Usually there's no problems. There's never a red flag. We have a good relationship with National Title. We have a title review with them and confirmation that they'll insure it," Kelly said.

The Congressional Oversight Panel issued a report Tuesday that said the disarray could threaten major banks with billions of dollars in losses, deepen the disruption in the housing market and hurt the government's effort to keep people in their homes. The full impact is still unclear, the report noted.

In the best-case scenario, the watchdog said, concerns about the paperwork mess are "overblown" and banks would be able to proceed with foreclosures as soon as invalid court documents were replaced with proper paperwork, Reuters reported. But in the worst-case scenario, the watchdog said banks could face billions of dollars in losses.

At the end of the day, it will be determined that documentation is in order and banks will proceed with foreclosures, said Tim Blankenship of Santa Clarita (Calif.) Short Sale Center.

Unfortunately, the moratorium will not be a windfall for delinquent homeowners, just a small hiccup in the foreclosure process that will only delay the inevitable, the distressed property expert said.

"I don't think it'll be an issue. Maybe in a few select cases, but I don't think buyers of short sales and foreclosures need to be concerned with the title issue," Blankenship told the Review-Journal on Tuesday. "All that will come of this is another delay in the housing recovery. We need to stop playing with it and let it go through the process."

Blankenship said he can certainly understand why people are "jumping on the bandwagon" to stop foreclosures, but the majority of those homes are vacant and close to the final stage of the process.

"So not a lot of homeowners would actually be affected. We are not talking about throwing families out into the cold," he said.

Realtor Tim Kelly Keirnan of Re/Max Extreme said short-sale and foreclosure buyers should make sure the seller has purchased a title insurance policy guaranteeing clear title upon escrow closing.

"This way the buyer is protected in case something comes up down the road. Also, the buyer can purchase additional title insurance prior to closing if he chooses to," Keirnan said.

The "robo-docs" scandal really started to gain momentum in the second week of October, said Jeff Tumbarello of Southwest Florida Real Estate Investment Association. He's had real estate-owned, or bank-owned, purchases put on hold as lenders file assignment of mortgages that are lacking.

He reported 439 lis pendens -- the formal notice that starts the foreclosure process -- in Lee County, Fla., for the first half of October, compared with 217 in the second half of the month.

"You have a pretty significant drop, which the robo-docs scandal has a lot to do with that," he said. "The real question is whether the trend is abating due to the natural ending of this trend or the robo-docs scandal, and I'd say the answer is 'yes' to both."

Sandy Hecht of Smart Fee Realty in Las Vegas said she's seeing bulk purchases of foreclosed homes by limited liability companies, or LLCs, many of them from out of state. They're looking at smaller properties for under $70,000, homes that a bank typically won't finance.

The number of homes purchased with cash accounted for 46.5 percent of all sales in October, the Greater Las Vegas Association of Realtors reported.

That's an "astounding" percentage, possibly the highest in the nation, Steve Hawks of Platinum Real Estate Professionals said. It shows how investors would rather put their money into distressed Las Vegas properties than keep it in a savings account at "artificially" low interest rates, he said.

"People are flocking from all over the country to try and buy rentals in Vegas because we have the highest return on investment in the United States," Hawks said. "The cash flow on an average property is staggering compared to current alternative investments. They'll make more in one month on their money than the whole year if the money was parked in a savings account."

For example, interest gained on a $100,000 savings account is about $875 a year. If someone bought a home for $100,000 and rented it out for $1,000 a month, they'd get $12,000 a year, minus maintenance expenses, insurance and property taxes.

Foreclosure sales in Nevada dropped 36.6 percent in October after a dramatic rise of 39.2 percent in September, Discovery Bay, Calif.-based ForeclosureRadar reported Tuesday.

The suspension of foreclosure sales by several large lenders returned overall foreclosure sales back to typical levels, said Sean O'Toole, chief executive officer of ForeclosureRadar. He saw evidence of those suspensions immediately.

In Clark County, notices of default fell 11.8 percent and notices of sale dropped 24.8 percent in October. Properties going back to the bank at auction sales rose 36.1 percent and sales to third parties -- typically investors -- were off 41.5 percent.

"Clearly there was a short-term big drop, but long term it'll be minimal," O'Toole said. "I think Bank of America will return to the market with foreclosure sales. They can't permanently exit."

While the primary impact has been Bank of America's freeze on foreclosure sales, foreclosure activity was still generally down in October, he said. With Bank of America's freeze still in place through the first half of November, he expects sales to be down as well.

O'Toole said there's higher risk at trustee auctions on the courthouse steps because you're buying without title insurance. Everyone else who buys down the road will have title insurance.

"Title companies continue to insure these transactions, so they obviously don't feel the risks are that great," he said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.