Neil Lende, Charlie Sugarman
Ross D. Franklin  /  AP
Real estate agent Neil Lende, right, talks with renovation project manager Charlie Sugarman after their latest flip renovation is completed in Phoenix, Ariz.
By
updated 7/4/2010 9:31:14 AM ET 2010-07-04T13:31:14

If we're going to search for gold in the wreckage of the mortgage crisis, then 6:57 a.m. in front of 1009 W. Juanita Ave. is as good a time and place as any to start.

The Cooper Ranch subdivision, 25 minutes from downtown Phoenix, is just beginning to stir. But when Casey Doran pulls up to his first foreclosure of the day, the tan stucco house has already seen a steady trickle of visitors.

"Still occupied," he says, nodding to a green tag hanging from the meter by the garage, proof someone's paying the electric bill. He leans on the bell, then tries the door. The house resists his advances, leaving Doran squinting into the darkness behind the blinds.

Three hours from now, the intelligence gathered in these 10 minutes of reconnaissance will be put to the test. That's when 1009 W. Juanita and nearly 600 homes like it are scheduled for the auction block.

Maybe, with bidding set to open at $105,000, this house is a bargain.

Or maybe it's a mistake, waiting to drag an investor under.

Either way, there's little time to ponder this 1,631-square-foot gamble. But there will certainly be other chances.

After all, 50,000 homes clog the county's foreclosure pipeline, with more added every day. But before you jump to buy, know that you'll have plenty of company.

At the top of the boom, speculators swarmed cities like Phoenix, buying up houses largely with borrowed cash. Those who didn't sell in time were stung when the market collapsed. Now investors — many buying with their own cash — are back. Since last year, the share of homes bought by investors at daily auctions has multiplied more than fivefold.

"These are unique times. Very, very unique times," says Tom Ruff of The Information Market, which analyzes Valley real estate data. "I think the best way to describe it is the Wild West."

The scene unsettles some, wary that investors could dump homes if the market weakens or take advantage of buyers or renters. Others are troubled at banks' willingness to settle at auction rather than give more substantial concessions to struggling homeowners. But something's got to be done with all these overmortgaged, underappreciated houses.

"The investors are a tool to help get those properties moved into new hands," says Diane Drain, a Phoenix bankruptcy attorney and real estate trustee. "At this point, the dam is so broken. How do you stop the flow? I don't know how you do it other than one little stick at a time."

Crowd gathers
During the boom, Steve Vadas sold title insurance on thousands of homes. Now, with business dried up, he's back at the job that gave him his start — in the shadow of the Maricopa County Courthouse, auctioning foreclosures.

In the old days, Vadas stood on the steps reading lists of homes aloud and alone, eyed like a crazy man by the occasional passer-by.

"Nobody would bid," he says. "I literally was reading them to the air."

No more. On a May afternoon, a crowd of 60 churns the plaza outside the courthouse doors. Bidders in board shorts and wraparound shades scan pages-long printouts and talk furtively into headsets to unseen investors. Five auctioneers compete for their attention.

Even in good times, some homeowners failed to pay their mortgages. But in a steady economy, auctions were largely formalities. With few bidders, most foreclosures were claimed by the bank holding the loan.

Then, home prices here plunged by half. Debt-saddled homeowners started abandoning houses in the dark. Lenders who never intended to get into real estate ended up holding the keys.

In the last year, they've done what any merchant would do to avoid taking delivery of unwanted inventory: Slash prices. No guarantees. No refunds.

"It's capitalism at its finest — or at its worst," Vadas says.

Stories circulate of buyers who realized too late they'd bought a second loan, when the first loan holder gets the house. Or of investors who bought only to find the tenant had taken cabinets, toilets, even the pipes.

"You can tell all the newbies," says Randy Lewis of bidding service 3rd Party Buyer LLC, scanning the crowd. "They're all up at the front, but not bidding."

But plenty have jumped in, posting the required $10,000 cashier's check and trying to leverage insider knowledge and a tolerance for risk. The result is what Lewis calls "chaos by statute," that begins as soon as opening bids are posted for the following morning's sales.

Deal chasers
"You've heard of storm chasers?" he says. "We're deal chasers."

On to the third house of Doran's morning: 1508 E. Weathervane Lane. Opening bid: $130,100.

A competitor exits the gate just as Doran, who scouts homes for bidding service Posted Properties.com, pulls up. "It's vacant," he says. "You can go inside."

Just past the pool — veined with cracks from standing empty under the desert sun (note to investor: could cost $5,000 to repair) — the sliding door yields easily. The place is empty of life except for a moldy loaf of raisin bread in the refrigerator.

Doran takes a few notes about this house, bought in December 2006 for $300,000. On the way out, he runs into a woman from next door. She tells him the former residents have been "stealing" fixtures out of the house for the past month.

"Hopefully soon we'll have a new neighbor," she says.

By mid-2008, Trish Don Francesco was ready to try the Phoenix housing market again.

Her company, Metropolitan Marketing & Management, had spent the boom assembling portfolios of houses for wealthy investors. In 2004, she urged clients to sell, believing prices had peaked. Instead, most held tight as values crested, then plunged.

But seeing homes for less than $100,000, she was intrigued. On a Saturday that August, Don Francesco drove to the Camelback Inn for an auction of houses.

"It was like being in a candy store," says daughter Makayla Don Francesco, also a broker. Houses were going for as little as $55,000. In a few hours, Metropolitan snapped up 17.

"I said to myself either the world is coming to an end or we're going to be really, really rich. I don't know which," Trish Don Francesco recalls.

She's bought 350 homes since, spending a few thousand dollars to fix and rent them, often to families who surrendered a previous home to foreclosure. Over the next year, she plans to increase that stake to 1,500 houses, buying on behalf of investors seeking a steady return from rents.

Information and cash
But investors are not the only players in this game, which trades in information as much as cash.

It begins each weekday afternoon, when trustees post opening bids for as many as 1,000 houses and property runners like Doran zigzag across the Valley inspecting the merchandise. They report back to companies like Posted Properties, which charge a fee to buy at auction.

Others work for wholesalers, who buy and flip to investors, often within hours, for a quick profit. Still other homes are bought by fix-and-flippers, who renovate and resell for a short-term gain.

When a family buys a house, it's all about emotion. But courthouse bidders trade bets with seeming disinterest. When the price goes too high, they walk away.

Unspoken, though, is the X factor drawing investors: the edginess of the gamble and the pursuit of a deal. Doug Hopkins, Posted Properties' CEO, recalls the morning he tagged along with a friend for his first trustee's sale 11 years ago.

"I remember coming out of there and calling my dad and I said, 'My life just changed.'"

Doran isn't sure what to make of today's fifth house: 6233 S. Parkside Drive. Opening bid: $67,000.

Fresh oil stains
Fresh oil stains the carport floor. A package sits unclaimed on the step.

It's an open secret in Phoenix foreclosure investing that, facing a door that won't budge, some runners drill the lock. Doran's real estate license lets him key in to some houses. But at Parkside, the back door slides open. He steps into the kitchen.

"I'm always afraid I'm going to find a dead body in one of these," Doran says, reaching for the refrigerator handle.

Not yet. But he has found cats and a puppy floating in abandoned pools. At an empty house in Chandler, he found an Alaskan husky, very much alive, left behind with a bag of dog food.

At this stop, though, the biggest complication is the house's size — just two bedrooms and one bath, limiting its appeal.

"Somebody will buy it ... for a rental," he says.

During the boom, borrowing was quick and easy. But buying at auction demands payment by the next day. Forget about a bank loan.

That's where Scott Gould comes in.

At 8:40 a.m. on a Wednesday, Gould tilts back in a black office chair, waiting for two phones and a Blackberry to ring so he can put his money to work. In shorts and running shoes, he looks more like the gymnast he once was than a banker. On the wall hangs a gift from his wife — a "loan shark" assembled from Monopoly money.

Hard money lender
Gould is a "hard money" lender, by some account's the valley's busiest. Last year he loaned investors cash to buy 1,300 homes at 18 percent annual interest. Call Gould for a loan and the answer comes back in 20 minutes, once his staff reviews sales of comparable homes.

"The most important thing at the end is, do we think the guy can make money," he says.

The phone rings. A fix-and-flip investor asks Gould for his opinion about a house in Mesa.

"The inside, from what we could see, looked good. It smelled good," the man says.

Gould, skeptical, counsels bidding $1 over the asking price and no more.

The phone rings again.

"Good morning, Brad. I got a check sitting here hot for you," Gould says.

This morning, though, is slow, with just three new loans. But a few miles away, a new round of sales keeps Makayla Don Francesco's ear to the phone.

When bidding begin, Metropolitan staffers lose out on two targeted houses and in the chaos, miss two more. But at a 10 a.m. sale, Don Francesco grabs a house for $72,300, before discovering it has two bedrooms and a den, limiting its rental appeal. Then she snags another in Buckeye for $66,000, although unsure if it has three or four bedrooms.

"There's a lot of risk and you are playing with somebody else's money," Don Francesco says. "Some days it is terrifying."

But then she reminds herself that the deals may last for only so long.

It's almost noon and this is Doran's 10th and final stop: 2701 Val Vista Drive. Opening bid: $387,600.

"Odd as hell"
"Holy moly," he says, pulling in. The house is very big. So are the mounds of trash in the overgrown yard. He knocks on the back door, then the front. Not a sound. But the place is unlocked. Doran rolls his eyes and steps inside.

"Somebody's still living here," he says, walking past dishes in the sink. "This is odd as hell."

At the living room, he tilts his head. Music floats up from downstairs — and men's voices. Doran takes one last picture, then moves quickly toward the door.

"Not worth getting shot over, I can tell you that," he says.

By Thursday, workmen have ripped out the ceiling in the house on Weathervane Doran checked out two mornings ago. And in a kitchen in Scottsdale, Neil Lende, a real estate agent who invests in houses given up for lost, is deciding where to begin.

The house, bought Tuesday and paid for Wednesday with a hard money loan, has a "popcorn" ceiling that will have to go. The pool is so green with algae it might as well be bottomless. In a valley full of foreclosures, what makes this a singular opportunity?

It's clear only when Lende opens another door in the Paradise Manor subdivision, 10 minutes away.

"When we first came to this one, this stuff was growing all the way out to here," project manager Charlie Sugarman says, pointing to shrubs that blocked the door. Inside, Lende found the kitchen plastered with coffee grounds.

Now, it's repainted in silver sage. The cabinets, refinished in cream, snuggle against stainless steel appliances.

Lende paid $194,651 for the house, then spent $35,000 to renovate. Tomorrow it goes to closing, sold to New Jersey retirees. For two months work — and risk — he'll pocket a $40,000 profit.

But while the new owners know they're buying a foreclosure, they almost certainly don't realize the pipeline it has traveled.

"I don't think they can envision it how it used to be, which is good," Lende says. "Because this is the reality now."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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