Capitalizing on Steamboat's Foreclosure Market
In just one short year, real estate foreclosures (aka real estate owned (REO)) properties have become commonplace in the Steamboat Springs market. It is a very particular and specialized area of real estate to be involved, as small fortunes have been made and also lost by those who have invested.
In my November, 2008 newsletter entitled The Scoop on Routt County Foreclosures I reported on the status of the Steamboat Springs foreclosure market. At that time, the number of Routt County foreclosures was relatively unchanged over the past ten years and it seemed that the Steamboat Springs area was immune to the epidemic that hit most other areas of the national real estate market. At that time, the past ten year average of properties that were seized by lenders for non-payment of mortgages averaged 40 per year. However, over the past 18 months since that article was written, the foreclosure bug, like the pesky pine beetle, has found its way over the pass and is infecting the local market.
The article also reported that while the state wide foreclosure rate was 1.85% in 2007 (the last full year to report at that time), the foreclosure rate in Routt County was a mere 0.33% (47 foreclosures for 14,273 housing units). But since then a substantial jump in the number of foreclosures have occurred. In 2009, the Routt County Treasurer reported 195 foreclosures in 2009; nearly quadruple the number over the prior year. Those foreclosures, out of 14,700+ housing units puts Routt County at 1.32 foreclosures for every 100 housing units (1.32%), still lower than the Colorado average of 1.91%.
Steamboat Springs was not alone in this increase in foreclosures, as similar increases occurred in other Colorado resort communities. Summit County (Breckenridge, Arapaho Basin, Keystone and Copper Mountain) doubled from 0.50% to 1.05%; Eagle County (Vail and Beaver Creek) increased from 0.52% to 1.68% and Pitkin County (Aspen, Snowmass, Buttermilk and Aspen Highlands) rose from 0.13% to 0.93%.
As foreclosures have become more prevalent in the market, the Steamboat Springs Multiple Listing Service has added a foreclosure and short sale feature to allow members to search for properties (or be aware of properties) that may fit into one of those two categories. If you're a potential buyer of a distressed property, it is very important to know the difference:
Foreclosure
A foreclosed property is one where a lien holder (lender) has taken legal ownership of the property. There are three types of foreclosures in Colorado: 1) Public Trustee; 2) Judicial Foreclosure; 3) Tax Sale. The most common type of foreclosure is the Public Trustee Foreclosure.
The Public Trustee Foreclosure is a process that is initiated from an owner's inability to meet loan obligations (payments) on a deed of trust (an instrument which grants the Public Trustee the right to sell the property at public auction in the event of default). When lenders provide a loan to a borrower, the tangible security the lender receives is typically in the form of real estate. That way, if the borrower defaults on the loan contract, the lender could recoup his investment by taking ownership of the security and either selling or retaining title. Lenders are in the business of lending money, not property ownership and management, so they typically will sell the property to recover their investment, then loan that money to another borrower. This is where the foreclosure process begins. It can end in one of four different ways:
1) The borrower pays off the default amount during the Cure Period.
In Colorado (foreclosure law is different from state-to-state), when a foreclosure proceeding occurs, the lender sends a Notice of Election and Demand (NED) to the Public Trustee. The Public Trustee then has 10 days to record the NED, which then starts the Cure Period. The Cure Period lasts between 110 to 125 days. Within this Cure period, all parties who have an interest in the property (of public record) will be notified of the foreclosure. The property owner (borrower) may reinstate the loan by paying off the default amount during this period.
2) The borrower sells the property during the Cure Period.
The Cure Period is also known as the Pre-Foreclosure period. For buyers, this is the best time to purchase the property. To avoid foreclosure, the owner will most likely have it listed for sale in the local Multiple Listing Service. Buyers will be negotiating directly with the owner, and the seller may be willing to take a discount on the sale to keep the looming foreclosure off of his/her credit history. Furthermore, a buyer will eliminate the daunting task of working with the lender, attorney and other parties that will be involved in the process once this period has passed.
3) A third party buys the property at Public Auction.
Near the end of the Cure Period, if the loan has not been paid off, the Public Trustee will schedule the property to be sold via Public Auction. The highest bidder will then take title to the property. When pursuing a property within the Public Auction timeframe, Buyers (and your exclusive buyer's broker) will have to work fast to conduct a comparative market analysis, as well as research the title work, liens and encumbrances that would run with the property.
4) The lender takes ownership by buying it back during the Cure Period or Public Auction.
Should no third party step up to the plate and purchase the property, the lender then takes ownership and the property is considered Real Estate Owned (REO). Once a property becomes REO, they will typically list the property for sale with a local REALTOR. Any negotiations will be conducted directly with the lender, which can be frustrating, as layers of corporate protocol take precedent.
Short Sale
A short sale is when an individual owner still has legal ownership of the property, but is advertising the property at a price less than the amount owed, or selling short on the indebtedness. It is most likely at a time when the owner/seller is delinquent in loan payments. Being that the seller is offering the property for an amount less than what is owed, the seller needs to obtain lender approval for the sale. The lender is the one who will be taking the loss along with the seller. Not only will a seller's credit be impacted by this unfortunate situation, but the amount of debt relief (amount the seller is short on the mortgage) is considered income by the Internal Revenue Service, and taxes will need to be paid. Furthermore, short sellers have to wait at least two years before being approved for a mortgage to purchase another property.
Short sales require patience, tenacity and (did I mention) patience. Lenders have stacks of delinquent mortgage files on their desks, and it takes anywhere from 30 to 120 days for lenders to even look at an offer, let alone accept one. The percentage of short sale offers making it to closing is below 30%...mostly due to lender consternation, but also because buyers lose patience and interest in a property; find a better one during the wait; or have a timeline to move that does not meet the timeline of the mortgage company.
Buyer Beware!
There are many technical issues in dealing with foreclosure and short sale properties, and the above is only the tip of the iceberg when dealing in this field. Opportunities certainly exist in the foreclosure arena. However, a great amount of due diligence needs to be performed to ensure the property is worth considering. The condition of the property is the main one, as it may have been a while since anyone has occupied it. Plumbing, electrical and structural components all need to be inspected thoroughly. And don't be surprised if the fixtures to the first two components mentioned are missing, as some former owners may decide on their way out to take those with them.
Routt County foreclosures can come in all shapes and sizes. Current inventory includes a one bedroom and bath Phippsburg home for $34,000, to a brand new 9,000 + square foot home in Steamboat Springs near the Rollingstone Ranch Golf Course for over $3.9 million. Some of the unbelievable purchases that buyers have capitalized on include a five bedroom, five bath, 7,700 + square foot home with an indoor pool and only a few blocks from the ski area for $1.2 million; a five bedroom and five bath Dakota Ridge home with over 6,000 square feet (originally listed for $1.8 million) that was purchased for $1.25 million; a five bedroom, three bath log home in Stagecoach for $330,000; and a four bedroom and four bath Christie Club fractional ownership for $189,000.
If you would like to take a closer look at the foreclosure market, buyers can find available properties via newspaper notices, the Public Trustee, or various web site services. To see what foreclosure and short sale properties are available in the Steamboat Springs market, please visit my Distressed Property page located in the Property Search section of my web site.
Foreclosures and short sales are becoming more and more a part of the Steamboat Springs real estate market, and will continue to do so until the national economy begins to recover. So in the short term, there are some great buying opportunities in this arena. It is a wise decision for any buyer to consider all of the options available and even more important to have a seasoned professional like myself to help you consider all of the opportunities that may exist in the Steamboat Springs real estate market, while looking out for your best interests every step of the way!
