On a sunny fall Wednesday, Matt Steel is driving around Mercer Island looking for bargains amid what he calls “some of the most prime real estate in the world.” Even along the island’s Gatsbyesque outer ring, where custom-built mansions perch on hilltops overlooking Lake Washington, foreclosures have struck. Steel’s task: scope out the houses that are scheduled for auction in another two days.
He descends a steep driveway and reaches a newly constructed, 6,100-square-foot tan compound with a fountain on the front patio. “OK, now what I’m doing is turning the truck around for our safety,” he says, proceeding to point his GMC Denali back toward the road above, enabling a quick getaway if necessary. Then he gets out for “a quick walk around.”
Sneaking along a neighbor’s path, he crouches down to see whether there’s another house between this one and the glistening lake. There isn’t. “This is waterfront!” he exclaims. He heads back toward the front of the house and peers in the window. “It’s definitely lived in,” he says. “But lightly. They’ve got little furniture. Either it’s a second home or a single father whose daughter lives here on weekends.
“It could be a divorce is what caused it,” he says, speculating on why the homeowner has missed $134,000 in payments.
As the head of a company that buys up distressed properties, Steel’s job is to evaluate their condition and figure out what might be going on with their owners. One thing he likes to know is if the owners are still living in the house, because if they are it will be up to Steel and his client to evict them.
On this day, Steel visits eight houses. One multimillion-dollar mansion has copper-laced balconies and a wrought-iron gate covered with cobwebs, a sign that nobody’s come in and out of late. At a more modest rambler, Steel tries the outside faucet attached to a hose and finds the water has been turned off. Vacant, he deduces. He walks around to an overgrown garden; it betrays a history of such care that, he marvels, “Something happened.”
There are 156 King County properties scheduled for auction the following Friday. Steel and the six agents who work for him will visit as many as they can, then make presentations to potential buyers on their “hot picks.” Steel’s team then attends the auctions, held in Seattle and Bellevue, to buy properties on behalf of clients, and sometimes for themselves.
There’s so much work that Steel says he sleeps on a couch in his office three nights a week. “These are historical times,” he declares over coffee one morning in Redmond. No kidding. The real-estate crisis that is giving Steel and his colleagues so much business has already led to a Wall Street crash, a taxpayer bailout in the hundreds of billions of dollars, the bankruptcy of Washington Mutual, and arguably the election of Barack Obama.
But while the foreclosure rate in King County is generally much higher today than it was a couple of years ago, the recent numbers have actually started to go down. This past July, 730 properties in the county were scheduled for auction. In October, that number dropped to 643. “We’ve already hit the peak,” Steel asserts.
A number of factors are slowing the supply of foreclosed properties, including the bailout, by which the government has pledged to buy bad mortgages from banks, reducing their motivation to foreclose. The feds are also discussing extending help directly to homeowners by giving banks incentives to provide better terms.
All of which means that the kind of opportunities Steel and a bevy of others are grabbing in the current crisis probably won’t last forever. “We have about another year,” Steel speculates. He intends to make the most of it.
Steel is 31 and boyishly good-looking, with a salesman’s wide grin and upbeat energy that betrays no hint of the depressing arena in which he operates. “Who’s ready to make some money?” he enthuses one evening before a dozen or so potential buyers, including a software engineer and a retired bond trader, who have gathered for a presentation in Steel’s second-floor walk-up office in downtown Redmond.
“Foreclosure is not in our name,” Steel likes to point out of his company, which is called the Real Estate Investment Firm. “I’m not a real-estate agent, even though I have a license,” he says. “No, I’m an investment specialist.” As such, he says, “I’m not going to put you in my car and drive you around.” That’s for agents whose clients are driven by their “emotional” reaction to houses. In contrast, he says, most of the investors he works with “buy properties sight unseen. They buy on the numbers.”
Steel lives flashily and takes pride in the fact. “If you come over to my house,” he said a few months ago, “you’ll see it’s a $1.5 million house on Mercer Island. I have my choice of a brand-new black Denali or a black Infinity G35 sports car,” the latter decked out with $12,000 rims. He’s since sold the 3,500-square-foot Mercer Island abode, which had water views. He fetched only $1.25 million for it, but that’s nearly $600,000 more than he paid for it two years ago, when he bought the foreclosed property from a bank. He says he’s going to post a video tour of the house on his Web site with the caption: “Welcome to my flip.” He’s now living in a 2,700-square-foot fixer-upper he bought in Bellevue last year for $616,000, which he also plans to sell. Steel says he aims to buy and sell a property every two years, the period needed to realize savings on the capital gains tax, and so moves constantly, a lifestyle made easier by the fact that he is divorced and has little practical use for his mega-homes.
“It’s not who I am,” he says of his material possessions. “They’re financial leverage.” He traces his desire for wealth back to his teen years. When he was 17, attending Sammamish High School, his 39-year-old mother contracted cancer and had to leave her job in medical billing. As Steel recalls, she wanted to spend some of her last days on vacation with the family, but his father, who worked in insurance, couldn’t afford to take time off. “That will never happen to me,” he says he pledged to himself.
A friend advised him to “go out there, find someone whose lifestyle you want, and ask them how they did it.” He took the advice to heart. Once at a car wash, he walked up to the owner of a red Porsche and asked him how he made his money. The fellow told Steel he ran a food delivery business. Steel went on to pursue similarly unglamorous ventures, including a spa-repair business and a pressure-washing company.
All the while he maintained an interest in real estate. He ordered tapes from real-estate guru Carleton Sheets, he says, and “listened to them over and over again.” Around six or seven years ago, he decided to give up all his other businesses and start the Real Estate Investment Firm. From the start, he says, he looked for properties that were distressed, whether because they needed to be fixed up, offloaded by cash-strapped investors, or sold by banks that had failed to auction them off. But he stayed away from foreclosure auctions.
Indeed for decades practically nobody took notice of the auctions, except one Bellevue company, Dean Street and Associates, that made them their business. “There was no competition,” says Michael Lappano, a longtime Dean Street agent.
Then in 2003 a new company arrived on the scene, introducing a kind of high-cost, short-term, unregulated financing called “hard money.” The provider of “hard money” is usually a company supported by private investors who supply the homebuyer with cash—the only payment accepted at auction.
“It opened up the market,” says Hugh Stewart of the Kirkland-based company now known as Vestus. The number of buyers at auctions changed “from a few dozen to hundreds,” he says. They included schoolteachers, engineers, police officers—everyone who wanted in on the foreclosure market but didn’t “have half a million hanging around.” Little paperwork stood in their way. Vestus’ Web site lures prospective clients with the promise that funding requires “no qualifying, appraisals, or inspections”—looser rules even than those offered in the heyday of subprime lending. And indeed, some of the people who bought foreclosure properties ended up being foreclosed upon themselves.
As with the conventional mortgage market, the easy money available in foreclosures led first to a bubble and then a shakeout. Though the amount of inventory exploded, there were fewer people bidding once the financial crisis hit last year. That’s when Steel got into the game. “Wow, this is an opportunity of a lifetime,” he thought.
The crisis has proven to be a double-edged sword, however, as a full-blown economic meltdown has taken hold. “It’s probably one of the best times you could ever purchase in history, yet so few people can,” says Zach Anderson, whose company provides financing to Steel’s clients. Due to the escalating credit crunch, he says, his and Steel’s pool of clients—about 10 to 20 active buyers at any given time—is “about 10 percent of what it used to be.”
He and Steel maintain that business is still very good—especially when you compare it to the slump in the regular real-estate market. “Did I make $100,000 in commission last month?” asks Steel. “Yes.” He makes a commission when he helps his clients buy a property at auction and when he helps them resell that property in the conventional market. In a typical month, he says, he sells homes worth a total of between $2 million and $4 million.
No wonder many conventional real-estate agents are eyeing the foreclosure market. “It’s a tough time in our industry,” notes Windermere agent Tony Meier as he checks out a Bellevue auction for the first time earlier this month. Sitting on a ledge near the auction “crier” and flipping through a list of properties handed out by Steel’s firm as a marketing tool, Meier says he has watched “bank-owned properties hit the radar”—including in his own upscale Redmond neighborhood, English Hill—and wondered whether he and his clients should invest.
Not everyone in the field is eager to jump in, however. Jim Reppond, associate broker at Coldwell Banker Bain’s Lake Union office, says his business is down 20 to 30 percent, but that he has as much interest in working with foreclosures as he does in becoming a mortician. “When you go into the foreclosure business, you’re talking about people who have huge stress and sadness in their lives. You’re right in the middle of it, trying to make money. I couldn’t do that and sleep at night.”
Steel sees the predatory lenders, the ones who charged exorbitant interest rates and encouraged people to get in over their heads, as the bad guys in the foreclosure saga. As for himself, he says, “I’ve helped so many people.” He says he has knocked on the doors of many homeowners facing foreclosure and asked, “Hey, do you have this handled?” He claims he once renegotiated mortgage payments for a husband and wife who were simultaneously coping with foreclosure and the wife’s brain tumor, and charged them nothing. (The couple couldn’t be reached to check the story.) More often, he has offered to work with homeowners on preventing foreclosure through something termed a “short sale.” In such a scenario, the bank agrees to settle for less than what it is owed, allowing the homeowner to put the property on the market for a discounted price and sell quickly. But watchdogs in the real-estate field say that a short sale can be treacherous for homeowners, particularly when the person representing them is also representing a buyer looking for the lowest possible price, as is often the case.
And there are times when Steel and his clients turn adversarial with homeowners. One Tuesday at lunchtime, Emi Yoshida, a young, stylish employee of a company that imports and exports industrial products, brings a stack of pizzas to Steel’s Redmond office to thank him and his staff for their help in her purchase of a Des Moines property at auction. “I love getting bargains,” says Yoshida. “I go to Ross [Dress for Less]. I go to Goodwill.” And a few months ago, she snapped up a distressed fixer-upper for $170,000. After remodeling, it was appraised for $289,000, and she is now renting it out. She relates all this with a broad smile and in a soft-spoken way that reveals a sweet girlishness.
But Yoshida’s “exit strategy” (as Steel terms the post-purchase plan for making money) required her to evict the husband and wife who were living in the fixer-upper when she bought it. Steel helped her through the process. “Matt came to court with me” and brought a lawyer, she says. The experience was not pleasant. “They made it sound like I was a bad person,” she says. “But I did not make them not pay their mortgage for a long time [two years, according to Steel]. I wasn’t the direct cause of their financial difficulties.”
Difficult as such encounters are, she says, “It’s something I have to confront if I want to move forward.”
Says Steel: “I like vacant. You can go in and change the locks.”
Two nights later, Yoshida is back at Steel’s office for his weekly presentation of the “hot picks” among all the properties scheduled for auction the next morning. Sitting at a long conference table with Steel’s tiny dog on her lap, she’s looking now for a personal residence. There are two other investors, including a waiter for a Mexican restaurant who can’t get qualified for a loan from Anderson. He’s hoping to find a partner with whom he can invest.
Steel hands out a thick packet with several pages devoted to each property he thinks is a good deal. There’s a picture of each one, along with the name of the owner, the amount of their mortgages and defaulted payments, the number of bedrooms, bathrooms, and square feet, and data on sales of comparable properties. He then goes over them one by one, displaying the cover sheets on each one on an overhead projector while adding information gleaned from his personal visits.
“This is what we call a no-brainer,” he says of a lovely Seward Park bungalow that flashes on the screen. “When you’re standing on the deck, you’re staring at the water.” He notes that the “estimated opening bid”—not yet set by the bank, but calculated according to the amount owed—is $186,000. He estimates that the place is worth $400,000, “and I am being conservative. You can paint it, carpet it. The comps would even support $500,000.”
“Vacant?” asks Yoshida, hopefully.
“Not vacant,” Steel says.
Another no-brainer, in Steel’s eyes, is a Bellevue condo. Completely remodeled, “it’s an end unit with a view of downtown Bellevue,” he says. The bank is setting a starting bid of $200,000, and another condo in the complex recently sold for $400,000.
Steel turns to a Bellevue rambler with an estimated opening bid of $375,000. He estimates it’s worth half a million. “It’s just nice,” he says. “There’s got to be 50 buckets of roses” growing outside. “It’s got vinyl windows.” The owners, who are “definitely” living there, “are really taking care of the house.”
After showing a couple dozen picks, Steel cedes the floor to one of his agents, Kristian Aasgaarden, who hands out another thick packet describing properties he’s visited. One is a “beautiful house” in Magnolia that is also definitely occupied—”Right as I walked up, [the owners] pulled up to the front door”—and a Ballard craftsman he calls “an absolute steal.” The bank has set an opening bid of $375,000. “Spend 50 grand on paint and carpet. The place is worth $600,000 all day long,” Aasgaarden says.
Steel and his agents don’t talk about the personal stories that have led these homes to be on their list. But interviews with several owners reveal that at least three of these properties are owned by people who themselves are in the real-estate business. That’s not unusual, according to Steel. “They all bought houses they couldn’t afford because their income was three times what it is now,” he says. Or they refinanced to the hilt, thinking that the real-estate bubble would go on forever.
That lovingly maintained Bellevue rambler with the buckets of roses, for instance: That’s the home of a longtime realtor. Requesting anonymity for fear of damaging her professional reputation, she explains that she refinanced the home after her husband died in 2004 and she lost his income. “It was one of those bad” loans, she says, with an adjustable rate and prepayment penalties, but she took it anyway because “it was the only thing available at the time.” Last fall, the interest rate jumped from 6 percent to nearly 10, raising her monthly payments from $2,200 to $3,600. It was right around that time that the market started slowing down, halving her income.
The silver lining for this realtor in the deepening real-estate crisis is that she has recently found the bank more willing to strike a deal. “Six months ago, they weren’t even willing to talk,” she says. In July, the bank agreed to a payment plan. She hasn’t always been able to stick to it. Waiting for a commission on a recent sale to come through, for example, she was late on the last payment, which put her home back on the auction schedule.
Of those real-estate agents and investors waiting in the wings to snap up properties like hers, she says, “Some of them are vultures.” Like every homeowner whose pending foreclosure gets recorded with the county, she has been inundated with unsolicited low-ball offers. At a stressful time like this, she says, “you don’t need someone knocking on your door, telling you that you should sell.” But she considers companies like Steel’s, which regularly buy at auction, more “professional.”
Another homeowner whose property has popped up on Steel’s hot list has a similar attitude. He’s a businessman who buys run-down properties and rehabs them. According to his account and legal papers, the owner of one house he bought refused to move out and sued, dragging the businessman (who declines to be named) into a prolonged and costly lawsuit that is now jeopardizing his own northwest Seattle house of 22 years. In his immaculate living room, where everything from the overstuffed couches to several orchids is white, he takes out a bulging folder of solicitations that he has received since his house was scheduled for auction. They promise help, offer to buy, or suggest a short sale. He seems exasperated by them, but says he prefers mailings to intrusive or stealthy visits, when people walk around without his knowing it or pretend to be interested in buying the place when really they’re scoping it out in advance of the auction. Otherwise he doesn’t object to the folks who make money on homes such as his. “You know, it’s a free market,” he says. “I don’t have any heartburn about it.”
Jim Ceis takes a different view. At a recent Seattle auction in front of the county administration building, he stands right by the crier, making sure that the bank has followed through on an agreement to postpone foreclosure on his heavily-refinanced Lake Forest Park home. “Excuse me, that’s me,” he says when the crier calls out his address, and he proceeds to explain about the postponement. He then glances around to consider all the people who are here not to save their homes but to buy someone else’s. “They’re profiteers,” he says. “The people who are losing are the ones being foreclosed upon. They’re the ones really suffering.”
By the morning after Steel and Aasgaarden make their presentation, the rose-growing realtor and the Seattle rehabber have gotten their banks to postpone auction. Steel, after a flurry of late-night e-mails and calls to his pool of investors, has found potential buyers for 11 other properties, including the Ballard steal and the Bellevue condo. But these purchases will depend on how high the bidding goes. He doesn’t like to pay beyond 70 percent of what he thinks is the market value.
While one of his agents works the Seattle auction, Steel mans the Bellevue location, an uncovered cement courtyard outside an office building next to the Factoria Cinema. Both start at 10 a.m., and there’s no rhyme or reason to which properties show up where. Seattle homes are auctioned off in Bellevue, and Eastside homes in Seattle.
Under a cloudy sky that gives way to rain as the morning progresses, several dozen people gather in the corner of the Factoria site where the auction crier, hired by the trustee company that conducts the auction, holds court. Among the crowd is a smattering of real-estate agents, a couple of Boeing engineers, some business owners, and a Seattle City Light resource planner named Donald Tinker.
“I’ve watched my mutual funds lose around 20 percent this year,” says Tinker, who’s taken the morning off from work to come. “Housing prices have only dropped 10 percent.” So he wonders whether real estate might still be the better bet.
“Nobody knows what the value of these properties are,” says Ward Truess, a silver-haired client of Steel’s who owns a printing company called Eagle Print. He’s standing under an umbrella, dressed in a jacket and tie. But, he says, “the more investors who buy these homes, the better the economy is going to be.”
Dressed in pinstriped slacks and a black T-shirt bearing his company logo, Steel stands near the crier, chipper as ever. “I like watching people buy properties,” he says, scanning the crowd. “Most of them don’t know what they’re buying. I love it.”
The crier, a short fellow wearing a black baseball cap and a navy windbreaker, mumbles as he announces the start of bidding on each property, so that you really have to be paying attention if you want in. When he announces the Bellevue condo (properties are identified by their owners’ names, the only time they’re mentioned), eight people move in to take a numbered bidding card, which is more than usual. “It looks like it’s going to get out of hand,” Steel says. He starts things off with a bid of $200,053—one dollar over the bank’s opening price. Agents from the other companies chime in: “205,” “210,” “212,” “213.”
At $265,000, Steel throws his bidding card down on a picnic table. The bidding stops at $270,000, offered by a company called Foreclosure Solutions on behalf of its client, a first-time buyer named Mansour Biria who says he once owned a Toshi’s Teriyaki joint and who looks somewhat nervous as he steps forward to claim his prize.
Steel also drops out of the bidding on the Ballard property as it passes the $400,000 mark. The other properties he was interested in were postponed, including one he hopes to get through a short sale. At 12:30, with the rain now pouring down upon the few hardcore bidders who’ve stayed the duration, Steel leaves empty-handed. He doesn’t seem worried. One hundred and fourteen homes are scheduled for auction next week, 149 the week after that. And when the numbers go down, he says he’ll leave foreclosures behind and move on to the next thing. “The market is changing every day,” he says. “You just have to follow the trends.”