Big foreclosure market, deals can’t be ignored

Are you willing to trade a couple of weeks of home repairs and improvements in exchange for a discount on the price of your next house? Would you jump at a 20 percent to 30 percent price reduction? If you said yes, you are not alone.

Until recently, bank-owned properties rarely merited a mention as a segment of Atlanta homes being offered for sale. Today, that segment, also known as REO (real estate owned) or “post-foreclosure,” has swelled dramatically and has assumed center stage for home bargain hunters.

For most of the past 30 years, lenders have been largely spared the burden of taking back homes as borrowers defaulted. Healthy appreciation rates coupled with substantial down payments usually caused foreclosed homes to sell at auction. Lenders often postponed foreclosing on delinquent loans hoping that time would erase their potential loss.

But today, everything has changed. Most of today’s foreclosure auctions offer homes sold to underqualified buyers who made little or no down payment. Rising mortgage rates coupled with static or even declining values have caused investors to abandon foreclosure auctions.

As a result, lenders across America are now drowning in a flood of foreclosed homes, all sitting empty, many being vandalized and few being sold.

To make matters worse, lenders have been amazingly slow to react to the current environment. For example, lenders typically market these homes through local real estate agencies and require the properties be listed not at market value, but at an artificial price set high enough to recover all the lender’s loss. In addition, many lenders have a policy of refusing to spend any money preparing the property for market, regardless of condition.

Estimating the size of the REO market is difficult, but recently Georgia MLS reported that of its 71,000 active residential listings, some 7,400 were marked by the listing office as “bank-owned.” Add to that number the more than 1,000 FHA and Department of Veterans Affairs post-foreclosure homes offered for sale by the Housing and Urban Development office in Atlanta, and you come up with a significant portion of the metro Atlanta market.

Many of these homes are nearly new and still in relatively good condition. A surprising percentage are vandalized while vacant, with plumbing fixtures, copper pipes and even in-wall wiring missing. Air-conditioning compressors are also a favorite target because of their copper content.

Because REO homes almost always require some degree of renovation, and because lenders have been unwilling to realistically price these properties, retail buyers rarely considered the REO market. But lenders are finally getting the message that overpriced homes simply do not sell. There is now significant pressure on lenders to dispose of these “nonperforming assets” that can threaten the soundness of even large institutions.

In the past, these homes would eventually have been sold at discounted prices to investors who would then rehab the house and either resell at retail for a quick profit or place the home into a rental program. But today, there simply are not enough investors to absorb REO inventory.

Some of the bargains being offered are nothing short of remarkable. How about a 9-year-old, three-bedroom, 2.5-bath house in a nice subdivision in Lithonia that sold when new for $107,900. Current tax value is $144,000. This same house was recently appraised by HUD for $149,000 prior to any repairs. It sold as an REO in June as-is, needing only paint, carpet and appliances, for $90,001.

While this form of real estate bottom fishing may not be right for everybody, more agents than ever before are beginning to add post-foreclosures to their list of specialties.

In other brokerages, real estate professionals are adding “post-foreclosure” listings to their showings, recognizing that lenders must eventually sell these homes at some price.

There are major pitfalls to avoid:

» If the REO property has been

recently placed on the market, the lender usually has little incentive to lower the price. Lenders typically start high and begin cutting their asking price after 90 days.

» Lenders are notorious for failing to reply to written offers. It’s not unusual for written offers to go unanswered for two weeks or more.

» These homes are typically sold as-is, with no guarantees regarding condition or value. For this reason alone, extreme caution is appropriate.

» If the house needs anything more than minimal repairs, it may be impossible to obtain long-term financing until the repairs are completed. As a result, the buyer may need temporary cash to make the purchase and pay for repairs upfront.

Next week, I’ll give you some tips for negotiating with lenders.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.