On Monday morning just after 11 a.m., three bargain hunters gather on the Missoula County Courthouse steps as a fast-talking lawyer begins auctioning off a home in foreclosure.
"The property is sold on an as-is basis," says attorney John Nowakowski, representing the mortgage holder, Wells Fargo Bank.
The opening bid for 1806 Montana Street is $93,369, Nowakowski announces. Apparently the price is too high because nobody bites, and Wells Fargo keeps the house.
Such auctions on the courthouse steps—ground zero for the Missoula foreclosure market—have become increasingly common over the past five years. Between 2005 and 2009, bank repossessions quadrupled in Missoula County, jumping from 46 to 204. According to the Missoula Organization of Realtors, defaults held steady last year, with lenders repossessing 151 homes during the first three quarters of 2010.
Properties in default generally sell for the value of the mortgage note, which is typically significantly lower than today's market value. The discrepancy presents an opportunity for enterprising real estate pros looking for deals in Missoula and across the nation. In fact, in California, which has seen a significant spike in foreclosures, real estate agents hold foreclosure bus tours for thrifty shoppers. Searching for dirt-cheap homes has become such a widespread phenomenon that the industry has coined the term "house porn." And AOL.com last month cited "house flipping" as one of the top-10 crazes of the past decade.
The term "house flipping" doesn't sit well with Cary Gosselin of Missoula-based Home Savers of America, which specializes in renovating and reselling foreclosed properties.
"Just don't call me a flipper," says the blue-eyed 46-year-old with a close-cropped haircut. "I grew up in this town."
Gosselin may not call himself a house flipper, but he's among a growing number of profit-minded investors in Missoula becoming increasingly adept at maneuvering—and profiting from—an uncertain real estate market.
"Every day a house goes on the market, I am there," says Gosselin, who spends many weekday mornings on the courthouse steps eyeing potential deals. (He wasn't there Monday because only a mobile home was on the auction block.)
Gosselin declines to disclose how many homes he's purchased off the courthouse steps. But he says his dealings can yield a profit as high as 20 percent. It isn't easy, though. He says making money this way requires significant time and resources, largely because a house going into foreclosure can sit neglected for months, if not years. Without regular maintenance, paint peels, pipes freeze and mold grows. Sometimes transients make a home in empty properties. And it's not unusual for property owners in default, or others with access to a residence, to strip houses of anything with value, including fixtures, carpets and toilets.
"Cabinets, in about a third of the properties, they're gone. The toilets are gone," Gosselin says. "I add value to the property. Basically, we make the house right."
Among the impediments to newbies entering the fray, buying foreclosed houses requires cash, since trustees on the courthouse steps don't deal in mortgages. And you have to be savvy to ensure a new real estate investment doesn't come with an outstanding second mortgage or an old tax bill.
"It's risky," Gosselin warns those aspiring to get rich quick.
For those with little cash on hand, there are other, safer ways to scoop up deals on bank-repossessed property.
When a foreclosed-upon property reverts to the bank—as was the case with the Montana Street home auctioned off Monday morning—the industry refers to it as "real-estate owned," or "REO." A handful of local real estate brokers and agents, like Merle Unruh of Montana Westgate Realty in the Bitterroot Valley, specialize in buying and selling those bank-owned properties. Unrah says repossessed homes for sale through his office are lien-free. And he's got plenty of REOs to unload.
"The last year and a half has been the highest [number of REOs going up for sale] we've ever had—ever," Unruh says.
Unruh's office contracts with one of the nation's largest mortgage lenders, Fannie Mae. When the lender forecloses on a property, it typically asks Unruh to help formulate a sales price and market it.
Unruh estimates that between two and four new REOs come through Westgate per month. He quickly produces listing information on a dozen such homes for sale, including a $54,900 two-bedroom home for sale in Darby that needs a significant amount of TLC, and a 38-acre Corvallis parcel with a 4,000-square-foot three-bedroom home constructed in 2008 that's never been lived in. The bank wants $399,900.
"They're typically at or near what the mortgage was—unpaid principle, initially, anyway," Unruh says.
After properties sit for a bit, banks begin to drop the price.
"They want to keep the investment moving," Unruh says.
Gosselin, too, likes to keep his investments moving. That's why he stays away from high-end homes. The amenity market has been hardest hit by declining values. Sales of homes priced over $275,000 dropped by more than 40 percent between 2007 and 2009, according to the Missoula Organization of Realtors.
However, homes priced between $170,000 and $220,000 are still selling.
"It's the market that's actually holding value," Gosselin says.