Deal or No Deal? Low Interest Rates Lure Newbies

| Print Post This | Like (0) | Comments (0)

CHARIS BOSWELL AND STANLEY CLAYTON almost didn't find their dream house because foreclosures were getting in the way. The 23-year-old and her 25-year-old husband saw two foreclosed homes in such bad shape that they nearly stopped looking at any bank-owned homes during their search.

"Oh, my God," Boswell laughs. "They were so bad!" She says the basement in one house built in 2005 was completely moldy with water puddles all over the floor. The one that really rocked her had been intentionally damaged by the previous owners. "The closet doors were completely off, the walls were torn, and in the foyer, they broke some of the wood off throughout the entrance. As far as foreclosures, I didn't want to look at any more of them," she says.

The couple and their three children — 5-year-old Jada, 3-year-old Isaiah and 11-month-old Caleb — had outgrown their Alexandria, Va., rental apartment and figured now was a good time to buy. "Our rent was going up to $1,800 [a month], and we wanted to put that toward a house that we'll own one day instead of throwing it away."

They're not alone. Plenty of first-time home-buyers are being enticed by the current market, with an enormous selection of houses offered at bargain-basement rates by banks anxious to dump them. In fact, foreclosures account for a huge chunk of the housing inventory.

"Based on what I've seen, foreclosures are the market," says Clint Burnham, an agent with Exit Advantage Realty in Fairfax, Va. "It's difficult right now to find a house that's not in some sort of foreclosure."

Burnham estimates the average client looks at 10 to 20 homes and all but one or two of them are somewhere within the foreclosure process (sometimes called an REO, which stands for real-estate owned). But just what kind of deal can you get on these haunts?

"The bank is still trying to make money," says Burnham. "Everyone wants to get a steal. Be realistic — be prepared to offer the standard 90 to 95 percent of list value, because banks won't consider offers that are below their numbers."

Unlike traditional home sales, houses that have been foreclosed on are typically marketed as-is. They may not be as trashed as the ones Charis Boswell and her husband saw, but that doesn't mean they're move-in ready. A property that's stood vacant for some time may have mold or other climate-related issues from being locked up. Even a recently vacated property was likely compromised when the previous owners couldn't make the mortgage payments, so roofing and siding, appliances and the electrical and HVAC systems may not have been properly cared for. At a minimum, most REOs require aesthetic attention like new paint and flooring, and general handyman-type fixes.

Erik Gutshall, a general contractor with Clarendon Home Services in Arlington, Va., sees it all the time. "When you have a home with a lot of deferred maintenance, these are the kinds of things that get neglected. The heating and cooling system may need to be upgraded, and rotting wood or windows in an older home may need attention."
When an owner is selling his or her own home, those are things that might be negotiated within the sales price. Banks are much less likely to pony up for repairs, which can be costly and can substantially increase the chunk of dough being dropped on an otherwise-less expensive pad.

"You have to be willing to take on a certain amount of risk with a foreclosure," Gutshall cautions. Which, loosely translated, means buyers shouldn't sink every penny into buying the home, because unexpected expenses may crop up after settlement.

"Be ready to make repairs, and don't expect to get to buy the perfect home in the perfect condition," Burnham advises. "Have your criteria of what you need and stick to it when house hunting" so you don't get caught without the means to update your new home.

Of course, a good home inspector will catch most problems before settlement but, when it's a bank-owned home, the buyer's still very likely to be on the hook for fixing them.

Beyond repairs, foreclosed-on homes have their own set of potential legal pitfalls. D.C., Virginia and Maryland have a non-judicial foreclosure process that's handled outside of the court system. That means that if just one piece of the puzzle is not handled correctly, the proud new homeowner could be in for a nasty surprise.

"If the title company or foreclosure lender missed one part of the transaction, the previous owner could come back six months later and say, ‘No, I still own the home,'" according to Raymond Sidney-Smith, a principle with Meridian Title in Alexandria. As a result, he emphasizes the critical need to purchase owner's title insurance and use a competent settlement firm or title company when buying a foreclosed property. "It's the cheapest insurance you'll ever purchase. Even if the claim is false, you'd still have to pay thousands of dollars in fees to defend yourself."

Sidney-Smith also warns that REOs may be challenging to buy. "The property may be encumbered by judgments, garnishment of wages, or property tax and homeowner's assessment liens," he cautions, which may make the home difficult to clear in a transfer. He advises that prospective buyers work with an experienced agent and title company to be sure all the I's are dotted and T's crossed.

The other thing buyers need when dealing with a bank instead of a private seller is patience. "When you're dealing with a seller, you usually make your offer and get an answer that same day," Burnham says. "With a bank, you're looking at three to five days for them to give you a counteroffer, and after you come back with your deal, you wait another three to five days."

It takes so much longer due to red tape and a whole different scenario. Banks are open only during business hours, as opposed to a homeowner who's willing to consider your offer at 8 p.m. To add to the delay, banks are inundated with thousands of properties to process, and they can handle only so much from 9 a.m. to 5 p.m.

Bottom line? "If you're looking to buy a foreclosure, start the process three to four months before you want to move in," Burnham says, "because it will take you awhile to find one that meets your criteria, then another month to negotiate and another 30 days to settle."

Charis Boswell and Clayton Stanley got lucky. They started their search in early September and made an offer on a bank-owned, three-bedroom townhouse in Sterling, Va., by mid-month. They are set to settle in early October. Her main concern was the "as-is" status, but the bank was willing to pay to have the 1,600-square-foot home's water heater replaced. She is most excited about the two full bathrooms and two half-bathrooms in the new house, because it means "everyone has their own place."

Written by Lynn Thorne for Express
Photo by David McNew/Getty Images