- The Washington Times - Friday, August 21, 2009

Bargain home hunters have been snapping up foreclosures in recent months, leading some homebuyers to compete in bidding wars. Buyers need to be aware that foreclosures are sold “as is,” so they need to be prepared financially to make home repairs, although occasionally the bank will pay to correct major defects. In spite of these caveats, some foreclosure stories have a fairy tale ending.

When Jocelyn and Sergio Basturescu moved to the D.C. suburbs from New Hampshire earlier this year, they began looking at homes in their price range. As they searched for a home, they found that many of the properties in their price range were bank-owned.

“We were surprised at the different conditions we found in foreclosures,” says Mrs. Basturescu. “Some weren’t well-cared for at all, but others had updated kitchens and baths that the owners had put in before they couldn’t afford to keep the home. Our goal was to find a place that wouldn’t be a major fixer-upper, but we were willing to paint and fix minor flaws.”

After five months of searching, the Basturescus found a single-family home in Gaithersburg. Built in 1980, the home was owned and occupied by a builder who had kept the home in perfect condition until he sold it in 2006. The last owner, who had lost the home to foreclosure, had been less able to take care of the property.

“If you are going to look at foreclosures, you have to keep in mind that the people who left it didn’t move out willingly,” says Mrs. Basturescu. “You might have to do some extra cleaning and painting.”

A home inspector found that the roof needed to be replaced, but the Basturescus were fortunate that the bank was so eager to sell the home that they paid for a new roof installation. Not all banks are as accommodating, but in the cases where major defects could prevent the sale of a home, some lenders will pay for the repairs.

“We were lucky that the bank paid for these repairs, but also that there wasn’t a bidding war on the house,” says Mrs. Basturescu. “We offered slightly above the asking price because we really wanted this house and had lost out on two other contracts before this one. We are so happy that we were able to move from a condominium in New Hampshire to a six-bedroom home on about a half-acre of land.”

Marcie S. Flournoy, a Realtor and an associate broker with Long & Foster Real Estate in Burke, says foreclosure buyers should do research and make sure they know where they want to live and what type of home they want to own.

“Buyers need to know that they are buying a home that will have value in the future and they will be happy to own,” says Ms. Flournoy. “They should work with a real estate agent with foreclosure experience who can negotiate on their behalf.”

Carol Schantz, an associate broker with RE/MAX Realty Group in Gaithersburg and the Basturescus’ agent, says foreclosures can be a bargain, but those with low list prices often receive multiple offers that raise the price.

“It’s very important for foreclosure buyers to have their financing in place because the bank won’t consider a buyer who is not preapproved for a loan,” Ms. Schantz says. “Banks also won’t accept a contract contingent on the sale of a home.”

Foreclosure buyers must also qualify for a loan from the bank that owns the home, even if they choose not to accept that loan, says Ms. Schantz. In addition, some banks require settlement to take place by a specific date, so buyers must have the loan process in place before making an offer.

Gene Mechling, a Realtor with Prudential Carruthers Realtors in Fairfax, says buyers need to be ready to move fast if they find a foreclosure in a popular price range or in an attractive area.

“If there’s competition for the home, the bank will ask for buyers to make their ‘highest and best’ offer, but they also have to make sure that the home will appraise for that amount,” Ms. Mechling says.

Buyers often opt for a loan insured by the Federal Housing Administration (FHA) because they are slightly easier to qualify for and require only 3.5 percent for a down payment. But FHA and Veteran’s Administration (VA) loans have more stringent appraisal requirements, which sometimes can prevent their use for a foreclosure.

“FHA loans require that the home is in livable condition, so if the appliances are missing, the home won’t pass an inspection,” says Ms. Mechling.

When a bidding war takes place, sometimes buyers with conventional loans will win out because they are making a down payment of 15 to 20 percent and there is less concern about the home meeting the appraisal requirements.

Joe Henry, a Realtor with Keller Williams Realty in McLean, says that foreclosure purchasers can sometimes qualify for an FHA 203k mortgage, which wraps repair costs into the mortgage.

“A 203k loan is based on the anticipated valuation of the home after the repairs are made, so the borrowers can take out a mortgage for $300,000 to cover a $200,000 home and $100,000 in repairs if that much money is required,” says Mr. Henry. “The repairs have to be agreed on ahead of time and be done by an FHA-approved provider.”

Some buyers may also qualify for a “streamlined 203k,” which can be used to make more limited repairs.

Ms. Mechling says that 203k loans frequently have a higher interest rate than regular FHA loans and that buyers need to be able to qualify for the higher loan amount.

“A 203k loan can be a good opportunity for some buyers, but they need to understand that they must complete the work within a specific time frame and the work must be done by an approved contractor,” says Ms. Mechling. “Not all lenders can do a 203k loan, so borrowers should ask about this before beginning to look for a home.”

Mr. Henry says that buyers need to consider the costs of improvements to a home when determining how much to offer. If a home is in good condition, they probably should offer full price, but if a home is missing cabinets and appliances, the buyers need to estimate how much these items will cost and factor that into their offer.

“A lot of contractors can give an estimate in the early stages when buyers are looking at foreclosures so that the buyers can build that cost into their loan amount,” says Ms. Mechling.

Real estate agents say that home inspections are even more important for a foreclosure than a regular home sale, even though the homes are sold “as is.”

“Buyers should have a home inspection by a qualified home inspector so they know what they are buying,” says Ms. Mechling. “The bank hasn’t lived in the home and won’t know how old the furnace is or anything else. If the inspector finds a major problem that can be a deal breaker, then it’s worth asking the bank to make a repair. The bank may or may not accept that request, so buyers should never assume anything.”

Ms. Flournoy recommends having a home inspection performed as early as possible and says that buyers can make their offer contingent on a satisfactory home inspection, although not all banks will accept that contingency.

Buyers in recent years have been able to request closing cost assistance from many sellers, and banks will sometimes provide this help for foreclosures.

“Banks will contribute to the closing costs for some homes up to a certain percentage, especially if the buyer chooses to use that same bank for their mortgage,” says Mr. Henry. “Typically, buyers can expect to get about $5,000 in closing cost help.”

Multiple offers can create a frenzied situation for foreclosure buyers so they should be aware of the potential for overbidding.

“Buyers should bid to win if they know others are out there bidding, but they should also remember that there are multiple other properties coming on the market all the time that may be just as appealing to them,” says Mr. Henry.

Ms. Mechling also warns that foreclosure buyers should be even more careful than other homebuyers to make sure they have emergency cash reserves.

“Foreclosures can sometimes be more prone to unforeseen expenses such as a furnace needing replacement or leaking pipes because the house has been often been empty and the banks won’t know about the same issues as homeowners do,” says Ms. Mechling. “Buyers need to do a financial reality check and make sure they are not setting themselves up to fail by not being prepared for the expenses of homeownership.”

“Buyer beware” should be the mantra for all homebuyers, but the phrase has particular resonance for buyers of foreclosures.

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