Dark shadows

As Reno's foreclosure crises stabilize, nobody knows what the street looks like around the corner

You’d think foreclosure auctions would be more dramatic. After all, you’ve got anguished families in the mix, investors with startling amounts of hard cash, and auctioneers rattling away on the steps of the Washoe County Courthouse.

But for all their emotional potential, the events are pretty sedate, at least on the surface. Trustees and even homeowners have until the very last minute to postpone a sale, so buyers tend to stand around a lot, leaning against stairwells and messing with their phones until each round of bidding starts.

Many are middle-aged men in sneakers, ball caps and dad shorts. And plenty are savvy investors who seem far too relaxed for people with $100,000-plus cashier’s checks in their pockets, buying properties they’ve yet to even tour. The bidding process is understated, too—so much so that onlookers probably shouldn’t scratch their heads unless they want new digs.

“Sometimes [investors] just bid with their eyes, practically,” says Auction.com employee Dalene Vandermyden. “It’s funny.”

Her company isn’t the only one outside the Washoe County Courthouse each week. Auctions may draw crowds. Nothing is guaranteed: not turnout, nor a clear title, nor the promise there won’t be a gaping hole in your new floor.

“You hope you get a good deal,” says Guy Archer, an affable Reno native who bought a foreclosed house—a place off McCarran Boulevard he’d researched at length—on April 11. It was his first. These days, a buyer like him might save 20 percent or so, he figures, but “you’re not going to skin anybody.”

Chasing shadows

There's no doubt our market is on the upswing. In in the last year, it's shown as much as 30 percent appreciation in areas such as South Meadows/Double Diamond, and about a 25 percent bump on average. Interest rates have been historically low, too. And although Nevada still has the third-highest foreclosure rate in the country, according to RealtyTrac, the nation's go to real-estate site, the number of “pre-foreclosed” and bank-owned homes in Reno has dipped considerably since March of last year — by around 85 percent and 9 percent, respectively. In fact, the biggest problem for first-time buyers may just be the fact that houses in their price range are being snapped up so fast that they're hard to find.

But some say the whole market—or the way it looks, anyway—is a bit manipulated. My own agent, longtime real-estate agent Clay Alder, prefers to use the word “influenced.”

In a nutshell, Alder figures as many as 7,000 to 12,000 or more Reno-area homes that could be for sale right now aren’t, for various legal reasons. And in the unlikely but conceivable event they should all materialize at once, we’ll be in trouble.

“Let’s say there are 7,000 [such] homes out there,” he explains, noting that he’s not trying to sound alarmist. “If those homes were all to come on the market tomorrow, it would change the supply-and-demand model, and subsequently, I believe our market would drop in value.”

He’s referring to shadow inventory, which is a somber but not exactly urgent concern. Its scope can include seriously delinquent properties, those in some stage of foreclosure, and houses that are already bank-owned but not yet up for sale. And even right now, with the market beginning to stabilize, “the ingredients are there,” Alder says, for a fallout to happen. It’s probably not imminent, seeing as banks wouldn’t want to destroy the market for themselves, but it’s technically possible.

You may have heard of “zombie foreclosures,” too; they’re part of the same pie, and amount to foreclosures left unfinished by banks, and homeowners who move away without realizing said banks have halted or abandoned the paperwork, for whatever reason. Unbeknownst to them, these families actually still own their houses—and are on the hook for accumulating bills and upkeep, too. In fact, the whole undead-house issue is big enough nationally that a federal agency, the Consumer Financial Protection Bureau, has begun looking into it.

According to RealtyTrac, more than one-fifth of all active foreclosures in the United States are zombies, so to speak, and they happen to be on the rise in Nevada.

“It’s a tough, tough stat to track down,” says real estate agent Cory Edge. At any rate, “these unoccupied homes that are in some stage of foreclosure … have become a larger story lately, given the lack of [overall] inventory.” And that’s its own can of worms.

As for shadow inventory, the issue goes back to 2011, for our purposes, when well-known Nevada Assembly Bill 284 (A.B. 284) slowed the paperwork process for banks that would have otherwise been issuing widespread notices of default. (NODs, as they’re often called, serve as official notice that a borrower is behind on his or her payments. They also outline the impending foreclosure process.)

Basically, the legislation required that lenders prove their right to foreclose on each home. Seems reasonable enough, right?

Maybe, but as soon as the bill took effect, thousands of homes were on their way to a sort of red-tape limbo. Some owners simply stopped making house payments, opting to ride out the storm as long as they could. Others are still riding. Still others didn’t even know they were barreling towards foreclosure, and might not to this day, thanks to slowness on the banks’ part. Cue the zombie stuff.

Before long, another bill, A.B. 300, loosened the banks’ restrictions, but not entirely.

Then Gov. Brian Sandoval signed Senate Bill 321, which supporters called a homeowners’ bill of rights. It provides further protection for those whose mortgages are underwater, requiring, among other things, that lenders not start to foreclose on a home while simultaneously working toward a short sale with the owner. Forbidden or not, though, “You still see that happening sometimes,” says Mike Harding, another real-estate agent in town.

Alder often returns to talk of the ousted homeowners and occupants—families who’ve been stressed and heartbroken in the midst of a recession that hit Nevada like a ton of bricks.

“There’s plenty of blame to go around” with the mortgage crisis, he says, and he’s right. “We talk about it as numbers, but when you look at this as individual families, it’s terrible. It can wreck marriages, and cause a lot of long-term effects that nobody wants to discuss.”

Free and low-cost classes, mediation and legal assistance are available to help Nevada residents get through the foreclosure process and ensure they’ve taken every possible step to keep their homes. Alder also stresses that anyone in such bind contact his or her attorney and CPA as soon as humanly possible.

“There are a lot of people who’ve lost everything,” he says, “and they’re older; they’re not going to recover. The social impact of [foreclosure] is huge.”

Laws and lulls

Before A.B. 284, Washoe County averaged more than 500 defaults a month, says Steve Schiller, president of Ticor Title's Northern Nevada branch. As soon as the bill became effective, that number dropped to 13.

“I think we can all agree that not all those people just started massively making their payments,” says Schiller, who combed county and MLS records last year and came up with a high-end estimate of around 12,000 homes in shadow inventory. “These were still people who should have been going through the foreclosure process but weren’t, because the lenders either weren’t comfortable or couldn’t comply with the new statute.”

S.B. 321 “had a pretty dramatic impact on the foreclosure market,” too, he adds, albeit not as dramatic as in 2011. “We’re not working our way through all those defaulted loans that are out there still,” Schiller says. “We still have some potential for shadow inventory.”

Banks ought to have some insights too, of course.

Wells Fargo, Capital Pacific Bank and Bank of America—this last one of the biggest guns in the business—are among the financial institutions that own homes here in Washoe County. None of their spokespeople returned calls for this story, but Tom Traficanti, the executive vice president and chief credit officer at Heritage Bank, was happy to talk. Granted, Heritage isn’t a big mortgage lender, and only has one house currently in the foreclosure process. Go figure.

“We’ve probably foreclosed on less than 10 homes in the last five years,” Traficanti cautions. But Heritage handles construction and home equity loans, as he points out, and those are obviously wrapped up in the same market. “We don’t want that information to be potentially distorted,” he says, “by a large inventory of un-foreclosed homes. There are definitely still questions out there.”

Try this one: How many local mortgages are really in limbo?

“How many are there?” repeats Mark Ashworth, president of the Nevada Association of Realtors’ Reno chapter. “Well, we don’t know. That number depends on who we talk to.”

One of the chapter’s members apparently found data for area houses without power, for one, and reported that there were 6,000 of them. But as NV Energy spokesperson Faye Andersen asks, not unkindly, “How do we even know they exist, if they’re not getting electricity?”

Driving around, looking for dead landscaping and talking to neighbors is another way to find individual abandoned properties—or so says a regular auction attendee who’d rather not give his name, for fear of a clash with people who once owned the homes he’s buying. Vacancies aren’t the only problem, though.

“There are a lot of folks who are just in a stalemate with lots of lenders,” Traficanti says, citing daily market reports. “It’s probably hundreds of people, if not thousands, who are simply not paying their loans, and the banks are not doing anything about it. … I look at the numbers, and I think, ’How can this be?’”

It’s a tough thing to quantify, though, because even a public notice of default doesn’t mean a homeowner is getting the boot.

“Not everybody who’s missed payments gets a notice of default,” as Harding explains, “and not everybody who gets a notice of default even ends up going into foreclosure, or having to do a short sale. Even a notice of sale [before an auction] is not a definite track for ending up as bank sale.”

Plus, the occupant may even have enough equity to sell the place outright, without losing money on the deal.

“They might say, ’Wow, we can’t afford this any longer; we have to sell the house,” Harding adds. “But they might have enough to pay off their loan.”

Calmer waters

Erica and Nathan James, who are 29 and 34, respectively, sold a place last May—one Erica had bought herself before the couple got married. The Jameses then purchased land in Curti Ranch and began building a new house, which they finished last October. Without getting into much detail, Nathan estimates its value is mid-range.

October was half a year ago, of course, but “we thought it was fair,” he says, “as far as what we paid for the house … we were in the market, and the market came up quite a bit.”

Nathan works in the civil-engineering industry, so when the housing market ebbs and flows, so does his bread and butter.

“It doesn’t just affect the bottom-line of my house value,” he’ll tell you. That said, “I don’t want my equity to increase so substantially that the market crashes again.”

As for shadow-inventory, well, it’s a notion that makes him chuckle—particularly the idea of banks hoarding properties they already own.

“It kind of seems preposterous that they wouldn’t try to sell [houses] whenever they could,” he says. “Unless they’re getting money back from the government, it’s not in their best interest to hold onto those houses. It’s plausible, but mainly just confusing and ridiculous.”

Ashworth puts it this way: “Does shadow inventory exist? Yes. Do we need to be concerned? No.”

Back in 2011, he says, short sales and foreclosures comprised most of the market. Now he says more than 80 percent of it absorbed by good old regular sales.

Even Schiller, who worked hard to convince skeptical crowds about the extent of shadow inventory estate last year, says that “we’re starting to return to what I would call a normal market. Is there going to be a time when hundreds of thousands of homes come flooding on our market and dramatically have an impact on inventory and pricing? No, I don’t think that’s going to happen. These things will work their way through.” There’s still work to do, he said, but “we’re extending the length of what I would consider to be our recovery.”

As Ashworth says, “the banks have learned from the past five years that what happens when they release all these foreclosed houses at the same time is they kill the market. They take it on the chin because prices are down. … If I’m the bank and I’ve got 10 foreclosed properties, I’m not going to put ’em all on the market on the same day.”

Let’s hope not.

At the end of the day, Alder’s take sounds like consumerism spiced with Zen.

“A lot of people I sell houses to, I tell them, ’It may happen, or it may not,’” he says of potential shadow-inventory repercussions. “We can’t do anything about that. We’ve got to buy a home.”

But for some buyers, especially first-timers, that may be easier said than done right now, thanks to a lack of supply.

Prices were on the rise in 2013, Ashworth says, because so many investors snapped up cheap inventory the year before, which in turn increased demand. Those numbers are apt to level out, but not immediately.

For now, buyers should brace themselves for interest rates that will slowly pick back up, higher prices at the midpoint, and scarcity in the $300,000-and-less range—“all challenges for someone looking for a first-time home,” Schiller adds.

On the other hand, he figures, “all those things are good long-term for our market. They may be a little bit of a struggle or a hurdle to overcome for people who are looking to buy a first-time home right now, but they’re all good things, because we’ve had such dramatic swings in median price and inventory numbers over the last several years.”

For what it’s worth, mid-range houses—ones that cost, say, $300,000 to $500,000—have more of a balanced market, Harding says, “and beyond that, it’s actually more of a buyer’s market. … But if you’re looking for a four-bedroom home and you’re only up to $225,000, you’d better be ready to jump on something, because there’s just not a lot out there.”

Savvy Investing

Last year, more than 40 percent of all homes sales were cash, “which is a pretty high number,” Schiller says, “and leads one to assume that it's a market driven primarily by investors looking to acquire property.”

Many are from California, he figures, and able to pay cash on the Nevada side as their hometown economy improves, too.

In other words, investors are a major force around here.

Unassuming as they may appear, the bidders on the courthouse steps are “following particular properties for a long time before the foreclosure,” says Rick Sharga, Auction.com’s executive vice president. “They know exactly what properties they’re interested in, and how they’re going to bid. It really is a business.”

In years past, Sharga says, “a trustee would just stand in a corner with a clipboard, with four or five investors he knew, and would divvy up properties.”

That can still happen, for the record. An April 4 auction put on by Nevada Legal Support Services lasted all of 10 minutes, and involved roughly three attendees and a young, bored-sounding rep who read addresses off a sheet of paper without removing an earbud from one ear. To be fair, she may have been waiting for calls about last-minute postponements and go-aheads.

Auctioneer Seth Seever, who contracts with Auction.com, is fun to be around, though, and does the whole “$100,000-can-I-get-one-twenty, can-I-get-one-thirty-beedabuh-beedabuh” routine.

Around 30 people trickle in to see him on April 11. It’s a sizable crowd, and the day begins with seven houses up for bidding. This can change at any time, however.

Many who’ve gathered here are uncomfortable with the idea of seeing their names in print—so much so that one begins to wonder if all the baseball caps and sunglasses are actually an attempt to blend into the scenery.

“Everyone down here is a competitor,” as one silver-haired guy finally explains, “and if we paint a more rosy scenario, we’ll get more competitors. If we paint a more bleak scenario, well, things aren’t so bad.”

As Seever starts doing his verbal acrobatics again in the background, another man turns on two voice recorders in case one malfunctions, then gets out a video camera and starts filming him, too. He says he’ll use this as study material.

The house in question has an opening bid of $1,000, which everyone knows is pretty absurd, and it quickly sells for more than $170,000.

“I just came here for the first time, to look at how it works,” says another potential investor, Shaukat Mehmood. He says a friend of his once bought a home for around $10,000, and now rents it out for $400 a month.

’Maybe I can do it,” Mehmood says lightly. “Maybe I can’t. I don’t know.”

A minute later, everyone turns to look at a convertible idling outside the courthouse. The driver is bassing a Beatles song, which is, A, actually possible, and B, even stranger in contrast to the fine-print, bureaucratic feel of the auction.

It’s loud enough to rattle windows: “Help me if you can, I’m feelin’ dow-ow-own, and I do appreciate your bein’ rou-hou-ound … ”

These investors are actually onto something, and they don’t seem as though they need much help. But the rest of us might.