The folks at Foreclosure Radar have provided a helpful snapshot of the Los Angeles foreclosure market (LA County Foreclosures Dec 2011). Some the highlights (or lowlights if you will):
- The median property value was $209,300.
- The property types break down as follows: Single Family 56%; 2-4 units 9%; and 5+ units 33%.
- The Foreclosure Outcomes chart is particularly interesting as it quantifies what you probably already knew. Of the 5,400 properties, 63% were Cancelled as a result of a loan mod or short sale, filing error or legal requirement to re-file the notice after multiple postponements. The lenders took back just under 28% of the properties for disposal through their REO networks. Barely more than 9% or 514 properties were actually sold to 3rd parties at the Trustee’s Sale. This limited supply partially explains why large investor groups who have broad geographic targets now dominate at the auctions. Individual investors who only focus on a few specific neighborhoods are finding the supply so constrained that it’s hard to justify the time and effort of going to auction.
- The Foreclosure Discounting chart also quantifies the fact that margins have become compressed at the Trustee’s Sales. The Winning Bid to Market Value discount for properties sold to 3rd parties is 22.5%. That sounds reasonable until you take into account 3-4 months of time spent in the eviction process plus associated costs to get the former owner out; property repair costs; and the property cost of sale for the investor. At a recent ULI breakfast panel on the state of the LA foreclosure market, one panelist estimated that the net margin was down to about 7% for properties acquired at auction. This data seems to support that.
Limited inventories and reduced margins combined with the potential downside risk of large, unanticipated property repairs means that buying at the Trustee’s Sale is not appropriate unless you are a seasoned individual investor.