Archive for Sunday, July 20, 2008

Foreclosure ‘deals’ carry fine print

Chris Earl, agent for Stephens Real Estate, is representing the owner of a home that has been foreclosed on, and now is going through a waiting period in which the owner can buy it back by satisfying the debt, plus fees and interest.

Chris Earl, agent for Stephens Real Estate, is representing the owner of a home that has been foreclosed on, and now is going through a waiting period in which the owner can buy it back by satisfying the debt, plus fees and interest.

July 20, 2008

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All this national talk of a suffocating credit crunch, compounding mortgage defaults and tumbling real estate prices has potential homebuyers angling for value.

Chris Earl understands that.

But the concept of buying a "foreclosed" home in the Lawrence area, he said, comes with a healthy dose of fine print that many folks haven't taken the time to comprehend.

"They think they'll get the $135,000 house for $75,000," said Earl, a Realtor for Stephens Real Estate in Lawrence. "Unfortunately, it doesn't work that way very often."

Earl, who figures he fields three or so calls a week from people interested in buying a foreclosed home, and others in the business often find themselves deflating buyers' visions of scooping up nice homes at cheap prices.

Instead, he said, buyers often find themselves coming up against relatively cumbersome processes for even securing the rights to buy such a home in deals that may not close on time or even close at all depending on a variety of players in the process.

Take a home at the beginning of the foreclosure process - one being sold at a sheriff's sale, offered only to "cash" buyers who line up as competing bidders on the proverbial courthouse steps.

To buy such a home at a foreclosure auction, a buyer must make the highest bid, have cash on hand - or, at a minimum, a letter of credit from a bank showing that the money could be turned over immediately - and be willing to buy the place without ever setting foot inside or having the ability to require repairs should a later inspection turn up problems.

Oh, and the homeowner - or a third-party buyer who acquires the homeowner's rights in an earlier transaction - can buy the property back within as many as six months or even as long as a year after the auction date, no questions asked.

Such uncertainties often turn potential buyers off from the foreclosure process, Earl said, because few people have the means to cut a full-price check the day of the auction, then let the money sit while the original homeowner's "redemption" period lingers.

"Ninety-five percent of the population is not capable of buying in that manner," Earl said. "You typically can't go to your bank and get a letter that says, yes, you can bid $150,000 and you can have the money in an hour, and that you'll take the house the way it is, no matter what condition it's in.

"But because that's difficult, that might be where you could get a good buy."

Even for those fortunate enough to grab a "good buy," the deal is by no means done.

Eileen Foy, a property appraisal and liquidation specialist for the Internal Revenue Service, recalls a foreclosed home selling for $17,000 at an auction. The new buyer was tickled to be picking up the property, which had been expected to fetch at least 10 times more.

Then the IRS, holding its own redemption rights, soon called off the sale, knowing that the agency was owed more than $17,000 and certainly could get more at a later sale.

"We went and tapped them on the shoulder and said, 'Yo, you could offer us something (more),'" said Foy, who was in the area recently to auction another taxpayer's assets in Overland Park. "We said, 'See ya. Here's your money back.'"

After paying back the new buyer's $17,000 purchase price, plus fees, the agency ended up selling the place later for $175,000 - and that sale, too, had been subject to another 180-day waiting period under which the taxpayer could have bought the home back.

Linda Trotter, a Realtor for McGrew Real Estate in Lawrence, was among more than 100 agents who attended a recent Kansas Association of Realtors seminar regarding foreclosures, short sales and related issues - an indication that such conditions continue to gain attention in professional circles.

For most of her clients, Trotter said, the effects of foreclosures on homes to be considered for purchase comes at the end of the process. When a property clears its redemption periods, the home can hit the market just like any other home.

Then it's up to the seller - often the bank that held the foreclosed mortgage - to decide whether to accept less money than what remains on the mortgage itself.

That's what happened recently in Trotter's neighborhood, when a $400,000 home went for $340,000, likely because the bank didn't want to keep the debt on its books, plus all the costs of paying insurance, mowing the grass and other expenses.

"That's (the deal) most people are looking for," Trotter said.

Comments

Sigmund 6 years, 8 months ago

This is a very complex and complicated process and not the simple get rich quick scheme of infomercial fame. In any event there are very few bargains. These properties get picked over very quickly, a couple of days not weeks, and the plums get snatched. What remains are probably priced fairly (no bargain) considering all the risks. The $340,000 house is probably is worth a bit more than that but probably it isn't in a "$400,000 neighborhood" anymore. Every day the stock market is opened I know the value of 200 shares of AAPL, for good or bad. No redemption rights, no back taxes, no insurance, and no grass to mow. Houses and neighborhoods go up and down in value everyday as well, but you really never know what it is worth till you go to sell it. The days of ever increasing values and foolishly over paying but counting on a bigger fool bailing you out in a couple of years are long over.Historically Lawrence home prices were ever increasing even when the rest of the Kansas and the country went through cycles. It has been a shock to most in Lawrence to see people lose money on their Lawrence home no matter what area they were in. If you must buy a home in Lawrence today here is a list of things to seriously consider.1. Home payment plus taxes and insurance should be around 25%-33% of your after tax income. Sure you're going to get a break on your income taxes for interest on the loan, but that doesn't build equity.2. Property taxes are ever increasing. The Lawrence City Commission, School Board, and Douglas County Commission show no signs of being able to live within their means and that is very unlikely to change3. Your streets won't get fixed because the City Commission will hold them hostage by funding everything else first and demanding a increase in sales tax and/or teal estate taxes before they fix them.4. Unless you buy relatively new construction (the 'developturd' crappy homes out West) be sure to constantly set aside large sums of money for new insulation, new roof, replacing water heaters, air conditioners, stoves, etc. 5. The romance of living in a older home on the East side quickly becomes a never ending hobby, a very very expensive hobby.6. You are probably going to be money ahead by renting especially in this market.7. Unless you have a good job in Lawrence then don't buy in Lawrence, sell even at a loss and move somewhere, anywhere, else that is closer to a good paying job then think of buying there.

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