- The Washington Times - Thursday, August 4, 2005

‘Buyer beware” is a mantra used by only a handful of home buyers in today’s market of excessive competition and few home inspections. It should become the battle cry for buyers of property that has been the subject of a bank foreclosure.

In real estate markets where buyers have the upper hand and homes are slow to sell, foreclosed properties can be a bargain. However, in a seller’s market such as the current local real estate scene, foreclosures can be difficult to find. Sometimes they are fought over by buyers with the same intensity as if they were standard homes for sale.

“Buying a foreclosure is not for the faint of heart,” says attorney Carol Blumenthal of Blumenthal & Shanley in Washington. “It used to be for professionals mostly, but now regular people are getting into it and the prices are rising, which should make foreclosures less attractive for the casual or new investor.”

Although some foreclosures are purchased by buyers who want to live in the property, most are bought as investments rather than residences. Corey Savelson, a Realtor with RE/MAX 2000 in Rockville, estimates that only 5 percent of foreclosure buyers intend to occupy the property.

As the general real estate market has changed, the foreclosure market has also adjusted.

“Foreclosures were very prevalent in the late 1990s, when so many mortgages had a high loan-to-value rate and prices hadn’t appreciated the way they have now,” Mr. Savelson says. “People had bought homes with 97 or 100 percent mortgages and needed to sell them, but they would have had to write a check to make up the difference between the sales price and what they owed on the loan.”

“Some people just had to let the home go,” he says. “But now consumers who find themselves in trouble financially will usually just sell their homes before it gets to foreclosure.”

Buyers can negotiate with a seller in the pre-foreclosure phase when the seller is struggling to make payments and may want to sell the home quickly, but these sellers can be difficult to find.

“In the past few years, tons of companies have cropped up who advertise that they will buy your home for cash before they go to foreclosure,” says Jim Downs, associate broker with Coldwell Banker Stevens Real Estate in Manassas. “A lot of people will choose to do this rather than put it on the open market, not realizing that they could probably sell for a lot more money if they did that.”

Mr. Downs points out that while foreclosures used to sell for 25 percent, 35 percent or as much as 50 percent off the market price, they are rarely available and almost never a bargain in today’s market.

“Sometimes today, the foreclosure properties are no bargain at all, especially because buyers are buying them without seeing them,” Mr. Savelson says. “But now people are buying these properties for their future value, anticipating the appreciation of the property.”

Investors who choose to purchase foreclosures need to be prepared to move quickly when they do find one to buy.

“Investors can find foreclosure auctions advertised in local newspapers in every jurisdiction for three weeks before the auction, but so many investors attend that the prices are usually bid up pretty quickly,” Mr. Savelson says. “It’s a good idea to call the attorney who has advertised the auction on the morning of the event to be sure it will take place. Often the owners find a way to avoid foreclosure at the last minute.”

Investors need to arrive with a cashier’s check or cash in the amount of the advertised deposit and should be prepared with a preapproval for a loan, just as any other buyer. If the settlement on the property doesn’t occur, the investor will lose the deposit.

“Financing for a foreclosure is similar to a regular purchase but not exactly the same,” Mr. Savelson says. “Investors can arrange for a mortgage loan, pay cash or tap into a home-equity line of credit on another property.

“They should expect to pay a substantial down payment because the risk being undertaken is greater,” he says. “Lenders will often look at foreclosure buyers with more intense scrutiny to make sure that the down payment is really there and that the appraisal of the property will go through.”

Two important concerns for foreclosure buyers: First, the property is always purchased in “as is” condition, with home inspections rarely part of the contract; second, the properties often are occupied.

“Foreclosure properties are frequently occupied by the debtor, who has no place to go and obviously is in financial difficulty; otherwise they would have paid their mortgage,” Ms. Blumenthal says.

“If you buy a foreclosure, you may find yourself as the landlord of a tenant who thinks this is all a railroad job. While the law says you can go through the process easily to get the tenants evicted, it is actually just the legal action for getting someone physically out of the house,” she says. “If the owners were wise, they would have sold the house, but they didn’t do it because they didn’t have anywhere to go. They will stay there until the buyer drags them out.”

Investors should be prepared to spend time and additional money to remove the former owners from the property, which is one reason why this type of buying is less appealing to people who want to move into the home. Buyers looking for a new place to live usually need to be able to move according to a particular timetable.

A variation of the foreclosure law in the District can cause additional problems.

“In D.C., the system is known as ‘nonjudicial foreclosure,’ which means that the homeowner can file a plea of title, which can involve the buyer in litigation that attacks the propriety of the foreclosure,” Ms. Blumenthal says. “In other jurisdictions, including Maryland, the foreclosure system includes judicial oversight, which means that the person in possession of the property has limited ability to fight the foreclosure in court.

“The casual buyer will borrow money from a bank and will need to make payments on that mortgage even if he or she is not in possession of the house and doesn’t have an income stream of rental payments from a tenant,” Ms. Blumenthal says.

In addition to having to remove former owners, a major concern with foreclosures is often the condition of the building.

“In a foreclosure situation, there is usually limited ability to inspect a property. Purchasers buy the home totally as is and without any warranty,” Ms. Blumenthal says. “The risk with a forced sale is that when owners lose their home to a foreclosure, they will trash the house or at a minimum take out everything of value, including the appliances. The buyers have no protection against this.”

Says Mr. Downs: “You are buying whatever problems the former owners had, which usually just means that the house needs some fresh paint and new carpet or sometimes a new appliance. But if they have been having financial problems for some time, the owners are not likely to have put any money into maintaining the home.”

Buyers’ concerns about gaining possession of the home and the condition of the property are not the only potential problems of buying a foreclosure.

Title problems and concerns about the payment of liens on the property should also be addressed.

“The title history of a property can be looked up on the Internet by the buyer, but these title histories can be complicated,” Ms. Blumenthal says. “There are professional companies that can do the research for you if it is too technical. Some title companies won’t insure the property when the house is still occupied by the previous owner.”

Title insurance is recommended for all purchasers, particularly of a foreclosure.

“If you purchase the title insurance and run into a problem, the insurance company will provide a lawyer plus what you have spent on the home,” Ms. Blumenthal says. “But appreciation won’t be covered, so the buyers will only be covered for the amount of the mortgage.”

Foreclosures are meant to wipe out the debt of the owner associated with the house, but the liens are paid in order of priority.

“First, the property taxes are paid, and then the first trust is paid and sometimes a second trust, too,” Ms. Blumenthal says. “But there could be other tax liens against the property, which the buyer would be forced to pay off. Investors need to search the lien situation to protect themselves from this potential problem.”

Given the dangers of uncooperative former owners, poorly maintained property, title disputes and liens on the property, investors need to weigh the risks of purchasing a foreclosure against the potential profit created by future appreciation.

Careful investors can still make money on foreclosures if they protect themselves with title and lien searches, title insurance, and the armor of enough money in the bank to make mortgage payments and home repairs before the home can be occupied by an income-producing tenant and before the property has appreciated in the marketplace.

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