Scanning the foreclosure listings to snap up your dream home on the cheap?
It's tempting indeed to take the bottom-fisher route, especially when bank-owned deals are so plentiful and annual housing prices in 20 major cities combined declined 3.8 percent in January, according to the closely watched S&P/Case-Shiller U.S. National Home Price Index released Tuesday.
But veteran real estate agents offer up some sound advice for would-be buyers homing in on bank-owned properties, short-sale deals, and foreclosures. Here's how to keep the frustration level low when shopping for your bargain-basement dream home.
1. Get your terms straight.
"Foreclosures" is a loose term that buyers bandy about when telling their real estate agent to seek them out. In most cases, homebuyers aren't really looking for foreclosures in the technical sense.
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"A real foreclosure is when the owner is losing their house and it's being auctioned off on the steps of the courtyard. You need to have cash to buy these houses, so it's usually only investors who buy foreclosures and get amazing deals," says Kristi Roberts, a real estate agent with McGuire Real Estate's Berkeley, Calif., office. "If the house doesn't sell on the courtyard steps, then it becomes a bank-owned house."
Nonetheless, when clients ask to be shown foreclosures, most real estate agents know they are likely asking to see bank-owned properties. Chris Dasaro, a Coldwell Banker real estate agent in the Grosse Pointe Woods, Mich., office that also serves the Detroit market, estimates that upward of 80 percent of his clients want to be shown bank-owned properties.
2. Don't get too excited about lowball listings.
In the greater Detroit area, where January housing prices were actually up 1.7 percent over last year, according to Case-Shiller, Dasaro has seen a couple of instances in which bank-owned properties were listed as much as 50 percent below the market rate. That, of course, generates a feeding frenzy where bidders in some cases end up paying above the market rate for a particular house.
Dasaro estimates that he encounters lowball situations like these in about 5 percent to 10 percent of the houses he sees, and notes that buyers would be wise not to get overly excited with anticipation that they could snap up the house at that listed price.
The lowballing is not a sales technique, but rather the likely result of the banks relying on broker price opinions rather than appraisals for the properties, says Roberts. She notes that she has also seen situations in which the banks have overpriced properties by a large margin, but often in those cases potential buyers are not disappointed if they don't get the house.
3. Prepare for big differences in bank-owned property sales.
Compared to purchasing a house from a private owner, there are more hoops to jump through when buying a bank-owned property, real estate agents say. Buyers should brace for:
• Far fewer disclosures from the seller regarding the condition of the property, because the banks rarely, if ever, visit the property they are selling, say real estate agents.
• Being pressured to buy "as is." Mary Ann Griffin, an associate Realtor with RE/MAX in Atlanta, says buyers should always make a contract contingent upon the buyer's home inspection, even if the contract notes that the sale will be done in "as is" condition. Griffin notes that securing a VA or FHA loan requires banks or other sellers to make appraiser-recommended repairs.
• "Gotcha" addenda in the contract. Roberts notes that banks will often include an addendum to the contract that may contradict something called for in the beginning of the document. Other addendum provisions may include clauses such as a $100-per-day penalty fee for every day the buyer is late in closing the deal or fulfilling a contingency.
• Lots of fine print. "Buying bank-owned property is like the Wild West of real estate. Sometimes you just have to put on your cowboy hat," Roberts says. "I'm a real cautious person and address these things by reading the document carefully and having a good team, where we stay on top of it and pay attention to the timelines and deadlines."
Taking Inventory: Foreclosure Finds Across the U.S.
4 Secrets to Scoring a Bank-Owned Property Deal
Location: Trenton, N.J.
Average Foreclosure Discount: 67.8 percent
Sq. Ft.: N/A
Trenton ranks No. 1 on RealtyTrac's list of cities with the steepest foreclosure discounts. This single-family, whose price was slashed recently, represents one of the killer deals you can find in the city.
Dating back to the 1960s, this Cape Cod-style home offers three bedrooms and two baths. Judging by the average foreclosure discount of New Jersey, the home could be running as much as $150,000 below market value.
Average Foreclosure Discount: 49.67 percent
Price: $3.75 million
Sq. Ft.: 22,000
Foreclosed homes in Atlanta are selling for a staggering 50 percent off, according to data from RealtyTrac. This vacant Mediterranean mansion offers a rather excessive four kitchens along with amenities that include a home theater, pool, spa, steam room and elevator.
Average Foreclosure Discount: 48.14 percent
Price: $4.29 million
Sq. Ft.: 12,129
It may be hard to believe that $4.29 million is a below-market price, but given that this stucco Mediterranean is bank-owned and Houston's foreclosure discount approaches 50 percent, odds are that the home could be quite a deal for a well-heeled buyer.
Location: St. Louis
Average Foreclosure Discount: 54.61 percent
Sq. Ft.: 1,342
This brick-built home, which dates back to 1930, probably hit the market at a reduced price to begin with, but now is running even lower, having just undergone a price cut. The home offers stained-glass windows and wood flooring along with a spruced-up kitchen.
Pictured here is the home's updated kitchen. The residence is even more of a deal if you factor in its purported HomePath Mortgage status. That means if you've got the right credit, you could snatch it for as little as 3 percent down.
Location: Lansing, Mich.
Average Foreclosure Discount: 44.31 percent
Sq. Ft.: 2,228
Squeezed into a condo community, this historic home stands out in the neighborhood because of its stately portico. The home has a long residential tradition, but could go commercial if the buyer so chooses: The house can serve as an office, according to the listing.
Location: Grand Rapids, Mich.
Average Foreclosure Discount: 43.45 percent
Sq. Ft.: 4,339
You get a lot of bang for your buck if you buy this four-bedroom contemporary. Located on a cul-de-sac, the home spans a generous 4,339 feet and offers a three-car garage. At under $300,000, that makes it an affordable luxury residence.
Location: Flint, Mich.
Average Foreclosure Discount: 21.55 percent
Sq. Ft.: N/A
Purchase a foreclosed home in Flint and you're likely to enjoy the benefit of more than 20 percent off. While the city's foreclosure inventory doesn't offer deals quite as striking as those found in some other cities wracked by the housing crisis, the town's average foreclosed-home price still falls far, far below the national median (which hovers above $200,000). Flint's average foreclosed-home price is just $60,578. This well-landscaped home demonstrates how far just $110,000 gets you.
Location: Easton, Pa.
Average Foreclosure Discount: 41.17 percent
Sq. Ft.: 1,556
Alright! A listing description that levels with you. "This is a property that needs some work," it states. The home is not without its virtues, however: It offers ample space, three bedrooms and an attic. Furthermore, buyers can acquire 3 percent buyer's assistance if they make an offer by the 31st of this month.
One thing buyers should watch out for if they think about shelling out for these digs is that, as with many other foreclosures, there is no seller disclosure for buyers interested in this home. That means, unless you pay for a thorough inspection, you could discover hidden flaws after purchasing the place.
Pictured here is the home's open dining-kitchen area. The place seems to be in pretty good shape for a foreclosed home. Many fall into poor condition, succumbing to insect infestations or other symptoms of neglect.
4.Know what you're in for in short-sale situations.
Bargain hunters are also keen to take a gander at homes listed as a short-sale. But venturing down this path can often lead to long delays in home ownership, and can sometimes fail in the end.
Under a short sale, the owner puts together a hardship packet that's sent to the bank and will sometimes include a sales contract with a prospective buyer, Roberts says. But it can take as long as six months before a bank responds as to whether they will accept the seller's plans for a short sale.
Roberts knows of one particular case in which an investor bid on a Berkeley, Calif., foreclosure on the courthouse steps. Although this investor lost the bid, he was curious nonetheless about the house that sold for $365,000 at auction. In making an inquiry, Roberts learned that the same house was in the final stages of approval for a short-sale for $425,000.
Not only was it a case of the left hand not knowing what the right hand was up to at the bank that was overseeing the transactions, but it ended up costing four months of time for the prospective short-sale buyer, Roberts says.
Another tactic short-sellers use is the illusion of a tight deadline. Recently, Roberts has seen a couple of short-sale auctions in which the listing price is set extremely low but the bids end up closer to the market rate -- but surprisingly, the window of opportunity doesn't close after the auction is over. The short-sale real estate agent continues to accept offers on the house for several more days in order to land the absolute highest price.
Says Roberts: "I have clients who want to go to these fake auctions, and we'll go, but I see how frustrating it can be for them."
Griffin offers these tips to short-sale buyers:
• Try to avoid "potential short sales" and seek out "approved short sales" instead. In some cases, banks will approve a homeowner conducting a short sale, even if no prospective buyers are listed.
• Work with an experienced agent who has a track record with short sales.
• Document all correspondence (for example, by using email).