Starting Price Deters Bidders

Sonya Schoenberger PhotoJuan and his son showed up at another foreclosure sale in Fair Haven, hunting for a bargain.

They didn’t find it.

The father-son duo have been hitting Saturday foreclosure auctions recently hoping to find an affordable home to fix up and live in.

This past Saturday that search brought them to a single-family home at 271 James St.

The starting bid for the auction was $124,000, placed by the lender. That was higher than Juan was expecting; it was also close to the appraised value of the home, which is $135,000. So father and son moved on before bidding was to begin.

It never did begin. Two other prospective buyers showed up but left before bidding began as well, because of the high starting price.

That left Robert Pellegrino alone. Pellegrino, a local lawyer who handles real estate cases, had been assigned by the court system to conduct the foreclosure sale. The lender foreclosing on the house, the Connecticut Housing Finance Authority (CHFA), is a quasi-public agency that helps first-time homebuyers obtain 30-year mortgages. CHFA set the initial bidding price.

Pellegrino oversees two or three auctions a year. He was not surprised when none of the prospective buyers outbid CHFA.

Buyers who bid on foreclosed properties without seeing the inside take on significant risk, he noted. It’s a bit like “buying an old car nobody will let you drive,” he said.

Because buyers of foreclosed property are unable to “look under the hood” to do a full diligence assessment of the property, there’s always the risk that repair costs might exceed initial expectations. Buyers also take on the risk of a non-refundable down payment. If individuals are unable to obtain financing to complete the purchase of the property, Pellegrino said, they are generally unable to recover this initial deposit, which is often upwards of $10,000. An asking price too close to the appraised value involves a significant risk with little financial upside.

For first-time home buyers, Pellegrino explained, buying a foreclosed property is generally not advisable. He said he has to navigate a “fine line” between representing the interests of the lender and ensuring that prospective buyers are not misled.

Most of the successful buyers of foreclosed properties Pellegrino has seen in recent years are serial investors, many from out of state. These investors are occasionally willing to pay more than the appraised value of a property when they anticipate recouping the difference from rent payments from multiple tenants, he explained. But this can be more difficult with single family homes, like the house at 271 James.

In this case, Pellegrino was forced to close the auction without any bids. CHFA, the lender that will now have the legal title to the home, will now go through the process of preparing the house for sale, a process that will require additional investment on CHFA’s part.

Pellegrino noted that lenders can be short-sighted in setting a high bid price for foreclosure auctions. By refusing to take a slight loss on the front end, lenders set themselves up for more significant losses down the road if the house won’t sell on the market for as much as they would hope after they invest in preparing the property for sale. In some cases, lenders “cut off their nose to spite their face,” he said. 

Olivia Davis, the woman who owned the foreclosed property, swung by after prospective bidders had left. She no longer lives in the home but has kept the alarm on, to make sure that no vandalism occurs, she said. Pellegrino was impressed by Davis’s attentiveness to the state of the property. “She wanted to be decent about it,” he said. “It was pretty noble, I thought.”

CHFA spokeswoman Lisa Kidder said the quasi-public agency will now market the James Street property on its own “Homes for Sale” website as well as through Multiple Listing Services (MLS).

“Every borrower’s financial situation is unique, and their financial health when they purchased the home obviously changed over time,” Kidder stated. She noted that the number of CHFA mortgages ended in foreclosure has been declining, mirroring an overall statewide decline. New Haven had 183 foreclosures in 2013, according to the Warren Group; in 2017, the number dropped to 130.

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posted by: Patricia Kane on October 11, 2018  3:14pm

Why aren’t there programs to keep owners in their homes rather than go the foreclosure route? Home ownership is dropping. Homeowners are more invested in their properties and because they don’t move so often, are more invested in their neighbohoods.
  An ongoing lack of vision and a failure to find new solutions just adds to the problem of empty houses and people in search of affordable homes.

posted by: newhavenlives on October 11, 2018  5:20pm

Pat Kane-
There are. Do you know how long it takes for a foreclosure to get to this point if the homeowners want to stay in their home? Some people and some lawyers have become masters at gaming the system. In other cases people may be so far underwater that they just need to move on and get a fresh start. That is not always a bad thing.

posted by: Kevin McCarthy on October 12, 2018  6:14am

Patricia, I don’t know whether CHFA’s foreclosure policies are appropriate. But nationally, the homeownership rate has been increasing in the past couple of years. It is now 64.3%, compared to a low of 62.9% in 2016. It still hasn’t returned to pre-recession levels. But I suspect that this is largely due to increasing student loan debt and stagnant incomes. In contrast, I suspect the homeownership rate is falling in New Haven, since hundreds of apartments but very few homes have been built here in recent years.

posted by: wendy1 on October 13, 2018  9:39am

I agree—-stop foreclosures.  Banks are corrupt and greedy, totally heartless institutions.  Meanwhile current sellers cant sell.  They need a profit to use for a downpayment elsewhere so they have to offer already overinflated prices when the buildings offered are all pretty much in need of some fixing.  Property values are shrinking as they should but this hurts former buyers who overpaid.  You can barely buy a shack for less than a quarter mill.  There are many victims here but not the banks.

posted by: Ryn111 on October 16, 2018  11:40am

Wendy - should any responsibility be held by the homeowner?

posted by: wendy1 on October 16, 2018  8:26pm

It seems the “former” owner is still invested in taking care of the property she left.  With this sick economy, I think homeowners deserve second chances, revised payment schedules, or whatever it takes.  Not all foreclosures are necessary or appropriate as has been stated in the media.  Lives and communities are disrupted.  I think mortgages are a scam meant to enrich banks and burden buyers.