May 13, 2004
Not so long ago, in the mid eighties to early nineties, in a number of cities and metropolitan areas, residential real estate foreclosures were an opportunity to “kiss the landlord goodbye” and move into home ownership with seemingly incredible deals. Remember back to the days of the creation of the FSLIC Resolution Fund and the Resolution Trust Corporation (RTC), when the oil patch was suffering from overbuilding (Houston) and the oil debacles of that time; when savings and loans were being closed on a daily basis and there was an over abundance of real estate awaiting a new owner? Opportunity for real estate investors was spelled out in three words: “foreclosure”, “REO” (real estate owned) or “OREO” (other real estate owned) to signify real estate forfeited to the lender through a non-judicial or judicial repossession action. In other words, good deals.
Today there is still the opportunity in selected markets and with selected properties to find a good to exceptional deal on a foreclosed home provided a consumer knows the market and the specific nuances of dealing on bank-owned properties. Indeed, sometimes these properties are a “steal”.
Although it is difficult to gauge the exact size of the market, high loan- to-value lending programs and reduced credit standards have virtually guaranteed a large number of properties reverting from private to institutional ownership, even in a period of extremely low interest rates and a generally positive real estate economy.
Gone are the days when the RTC would consider virtually any reasonable offer. Many of these properties were sold with concessionary financing and were discounted all in a valiant attempt to dramatically reduce bloated area inventories. Most lenders today measure every offer against a current market value appraisal and a Broker’s Price Opinion before they weigh in on giving a buyer a deal. They generally shoot for an execution of somewhere between 95-100% of these values which are based on sales of other non-foreclosed properties within the targeted 1-3 mile radius of their REO property.
On the other hand, real estate changes hands every day because the buyer values a property higher than the seller or at the same level. Institutional and corporate sellers don’t like to carry properties for more than six months because they have to continue to “mark” them to market, an accounting rule that requires that they adjust their carrying value. And oftentimes, when properties are on the market for an extended period, properties get stigmatized causing some buyers to shy away from them, offering an opportunity for the savvy buyer or investor. Because corporate and institutional sellers oftentimes have other accounting or expansion constraints, properties held on the books for extended periods may some times be “fire saled” just due to fortuitous timing.
As with any real estate purchase, there are certain “rules of the real estate road” and others which are extremely important in evaluating a foreclosed home.
1. Know what you are getting into before you commit to purchase. Due diligence is important in any real estate transaction but never so important as with a foreclosure. There are several reasons for this review. In most states, corporate and institutional sellers of foreclosed real estate are exempt from the typical Seller’s Disclosure Statements regarding the condition and defects of a property. This means that a Seller who has been through foreclosure may have information about the property that you will never know (such as there was a flood when the pipes burst last winter). Moreover, these Sellers will limit their post-closing responsibilities. Generally these properties are sold “as-is” “ where is” but with comprehensive protections to prevent a Buyer from ever coming back to the Seller after the sale. Unless you are a sophisticated investor or a general contractor, it is especially important for the purchaser of a foreclosed asset to avail themselves of all applicable inspections.
Because many foreclosed assets are in inferior condition vis a vis a typical owner resale, they may, on the surface, appear attractively priced. If you are a real handyman with expertise in large and small-scale repairs, you may avoid what otherwise might be a “Money Pit”. On the other hand, some of the best deals are on those properties which are really beaten up or but really only require cosmetic repairs such as carpet, paint and touch up. During your due diligence, try to ensure that the reason the property was foreclosed was not because it is located on an underground spring or that the backyard is sliding down the hill, or that the property suffers from some other inherent property related defect. Don’t be afraid to ask the neighbors. You’d be surprised what you’ll find out!
2. You wouldn’t go to a podiatrist if you needed brain surgery. Deal with a real estate agent or professional who is experienced in handling foreclosures. In most areas where there are lots of foreclosures there are many brokers/agents whose real estate practice is exclusively dedicated to foreclosed assets. They can help you with values, property condition issues, and what to expect in the transaction. They will tell you based on market conditions if this is a house that can be fixed and flipped or whether you will have to hang your hat there for a while waiting for the market to turn.
3. Don’t hire the moving company based on the contract closing date. As a class of assets, foreclosed assets have many last minute title problems, liens and encumbrances, assignments and transfers that may not have been properly identified and/or handled during the foreclosure process. The typical Seller’s contracts allow for reasonable extensions in anticipation of these frequent problems. Many states require that certain documents be recorded into the name of the Seller post-foreclosure, which bear taxes and other transfer penalties. This can mean delays for your closing if the proper vesting has not been completed prior to your closing. If you have committed to moving out of your home or apartment you may have to move twice. Just because you are ready to close, doesn’t mean the Seller or the title company will meet that deadline.
4. Always obtain title insurance, even if your purchase is a cash sale. I recommend this even if you are an experienced title attorney and even on a tradional resale transaction. I recommend it doubly on a foreclosed asset. Corporate and institutional sellers generally convey their foreclosed assets by Special Warranty Deed that only requires the defense of title for the period during which the institution owned the property.
Having said all of the foregoing, there still remains an opportunity and an upside to acquiring a foreclosed asset. In my 30 years in the business, I have seen some absolutely incredible deals where upon closing the happy buyer had a substantial equity, over and above, his down payment.
This article by Tom Di'Mercurio was originally published BuyBankHomes.com.