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Buying a foreclosed home offers risks, rewards

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By John Dayberry | Hickory Daily Record

Published: November 1, 2008

HICKORY - In some respects, buying a foreclosed property is like purchasing any other home.

"You want to get the largest house for the least amount of money in the best location possible," said Hickory Realtor Gina King, a licensed real estate broker, saleswoman and accredited buyer representative with Realty Executives of Hickory.

In other ways, the foreclosure market is an entirely different world.

"Remember, with foreclosures, it's always buyer beware," King said.

She ought to know.

A Realtor for 12 years, 75 percent of King's business is now foreclosures.

She has conducted two foreclosure bus tours since June, taking prospective buyers to foreclosed homes in Catawba and Caldwell counties. Both tours were sellouts, and King has since received requests for foreclosure tours of Alexander County, the Lenoir area and Lake Norman.

"No area is immune to foreclosure," said King, who has recently shown foreclosed properties ranging in price from $27,000 to $700,000.

"These days, it's across the board."

According to RealtyTrac, an online foreclosure marketplace, lenders repossessed 197,800 U.S. homes in the first four months of 2008 compared to 90,800 in that period last year, an increase of 118 percent.

Banks don't want those homes, and will sometimes accept much less than fair market value to get them off their books.

King said one can typically buy a foreclosed property in the Catawba Valley for 20 to 25 percent lower than fair market value.

"Sometimes more, sometimes less, depending on location and condition," she said.

And while loans are sometimes hard to find, they are still being made, especially if you have good credit.

While the qualifications for getting a loan are becoming stricter, mortgage money is still cheap by historical standards and is likely to remain so in the near future. The Mortgage Bankers Association projects that 30-year fixed rates will hover around 6 percent for the rest of 2008 and for at least the first two quarters of 2009.

The price might be right, but buying foreclosed properties often has drawbacks, said John H. Cilley, an attorney with Corne & Cilley, PLLC, Newton.

Cilley said anyone thinking about buying a foreclosed property, either to live in or as an investment, should be extremely careful.

"I've seen people make horrible mistakes that cost them thousands of dollars," Cilley said.
"Be very, very careful."

Following are some things anyone considering purchasing a foreclosed property needs to know:

FORECLOSURE

Foreclosure is the final step in a process of a lender trying to recoup money from a borrower who has defaulted on a loan. The bank either sells or takes back the home, resulting in a foreclosure auction or bank foreclosure.

PRE-FORECLOSURE

In some cases, a buyer can find a home in pre-foreclosure and purchase the property from the owner before the lender forecloses. The owner signs the deed to the house over to the buyer, who assumes the mortgage and makes any back payments due to the lender.

Once a notice of default is filed with the county where the property is located, a buyer can contact the homeowner by phone, mail or in person.

Benefits to the buyer of a pre-foreclosure sale include getting the home at a discount (typically 10 to 20 percent below its fair market value), and being able to conduct a title search and inspections before purchasing the property.

Pre-foreclosure sales also benefit the homeowners because they are able to avoid foreclosure and salvage some of the equity in the house.

AUCTIONS

Ever see potential buyers bidding on a foreclosed property on the steps of the county courthouse? That's an auction, and it involves lots of risks.

"I've seen people come to sales who really didn't know what they were doing, and it's frightening," Cilley said.

A buyer at auction won't be able to complete inspections or a title search of the property before purchasing it. The buyer is responsible for any tax liabilities or second mortgages against the property.

All sales are final, and payment is in cash or a cashier's check. Also, there is the possibility that the buyer will have to evict residents or tenants.

Generally, a home that's bought at auction sells for about 40 percent below market value.

Auctions can be located through dedicated Web sites, but many of them charge a fee to search their sites. Free information about upcoming auctions can be located in legal ads in local newspapers and in documents at the county tax department.

BANK-OWNED HOMES

Buying a foreclosed home directly from a lender is generally considered the safest way to purchase a foreclosed property.

The buyer knows there are no other liens against the property, and can make an offer on the home subject to a home inspection. The buyer can also arrange for financing, even get pre-qualified for a mortgage.

Typically, a bank-owned property does not sell at as big a discount as a pre-foreclosure sale or an auction, but good deals can be found, especially on properties that have been on a bank's books for 90 days or longer.

There are various online databases that list bank-owned real estate. You can also work with a local real estate broker, or contact the lender directly. Note that many lenders will work only with real estate professionals.

GOVERNMENT BUYS

Several government agencies have collaborated to sell foreclosed homes through HomeSales.gov. The Web site provides information about single-family homes for sale by the federal government.

Anyone can buy a home for sale by the government, but you must work with a real estate agent, broker or servicing representative to submit an offer or bid.

Both the Department of Housing and Urban Development and the Department of Veterans Affairs have foreclosed homes available for sale. HUD also offers a program to help public servants buy a HUD home at a discount.

RISKS, REWARDS

Most of the participants in King's foreclosure tours are people looking for investment property. They plan to re-sell the homes for a profit or to rent them. Some tour participants plan to live in the homes.
Either way, King offers them the same advice:

"Work with a qualified buyer's agent, get a survey and every possible inspection done, and hire your own real estate attorney," she said.

Are the risks worth the potential rewards?

Absolutely, King said.

"Personally, I will always invest in real estate," she said.

"Under the right circumstances, you buy a foreclosed house for $60,000, spend $10,000 fixing it up, then sell it for $120,000. Where else in today's economy are you going to find a better investment?"