Out-of-state homeowners add to

foreclosure woes

Absentee landlords lured to Central Texas by prices find

investments soured by high taxes, too-easy credit.

By M.B. Taboada
AMERICAN-STATESMAN STAFF

A few years ago, investors from California and other boom markets flocked to Central Texas, looking for homes to buy. Many bought several houses, hoping to cash in by renting out the homes.

But now some of those investors are defaulting on their mortgages and becoming a growing factor in the rising foreclosure problem in Central Texas.

In the past two months alone, foreclosures of homes owned by out-of-state residents have surged in Travis County more than four times the rate of foreclosures overall since last year, based on figures from Rexreport.com, a San Antonio company that compiles lists for investors who buy such properties.

Fifty-two properties owned by out-of-state residents — mostly Californians — are posted for the Aug. 5 foreclosure auction in Travis County. That's 13 percent of the total, up from about 5 percent in each of the past two years.

In Williamson County, 6 percent of the properties set to be auctioned next month have out-of-state owners.

In Travis and Williamson counties, foreclosures are up 23 percent this year, including the postings for the Aug. 5 auction. That brings them back to the levels last seen in 2004, when Central Texas was still reeling from the effects of the tech industry bust.

The next year, however, the local economy began a strong rebound. And that's when the housing investors arrived.

Builders and real estate firms began advertising in California, Nevada and other markets where home prices had skyrocketed, touting the relative affordability of homes in Austin and their investment potential.

The firms even took groups of prospects on bus tours of Central Texas properties for sale.

Maricel Ruzol, a Las Vegas registered nurse, took one of the tours in 2005 and bought an 1,800-square-foot ranch home in Pioneer Crossing, a Round Rock subdivision. She put 5 percent down and got two mortgages — both at subprime rates — for $151,600.

But it was harder than she had expected to find tenants, and the property taxes, much higher than in Nevada, shocked her.

When a renter's washing machine malfunctioned, causing water damage, Ruzol said, she could not afford the repairs.

Even after getting a second job, "I can't afford to pay the mortgage anymore," she said. "Those houses were nice, and they were really cheap, but they didn't explain the property taxes to us. And they are too much."

The bank foreclosed on the home this month.

The vast majority of out-of-state owners in Central Texas are from California, where surging real estate prices earlier in the decade allowed many people to borrow on the equity in their homes, based on Rexreport data.

"A lot of Californians had so much equity in their homes, they were looking at other places to invest," said Gary Painter, research director at the Lusk Center for Real Estate at the University of Southern California. "It only makes sense that once the Phoenix and Vegas markets shot up so fast that the investors were looking at other places that had less price risk."

Easy credit, and low or no down payments, also tempted many people to buy investment properties.

"They were not too concerned with what they were paying," said George Roddy Sr., president of Foreclosure Listing Service Inc., an Addison company that tracks foreclosures. "Their thought process was ... they would hold the property for five to seven years and wait for appreciation."

But when low teaser mortgage rates expired, adjustable interest rates shot up or the owners ran into financial problems, they could no longer afford the payments.

"The lenient loan process ... was ultimately the downfall," Roddy said.

Some investors bought two, three, six or more properties in subdivisions or condominium complexes. And some of them have lost multiple properties to foreclosure.

The investors lose money and end up with a black mark on their credit records. Neighborhoods can suffer if there are clusters of foreclosures, which can affect prices.

Peter Sajovich, a real estate investor and broker/owner with Re/Max Austin Advantage, said many of the out of state buyers were naive.

"They came in in 2005 and 2006 thinking our values were going to double like they did in California, and they borrowed every penny they could," Sajovich said.

But Austin prices never spiraled upward as they did in some other states, and when the investors couldn't find tenants or were faced with a big repair bill, they didn't have the money to do it.

"They got greedy, took the easy money, and now they are paying the price for it," Sajovich said.

David Buttross, an Austin investor in foreclosed properties, said many of the out-of-state buyers joined real estate clubs or went to investment seminars where they were told they could make a quick buck.

"They were bombarded with bogus information," Buttross said. "They paid more for the properties than they were worth. They don't have the financial wherewithal. They are smart people, but they haven't done it, and they didn't know the pitfalls."

Buttross predicts that foreclosures will keep rising as out-of-state investors leave the market.

"You are going to see a full-fledged retreat," he said.