By John Adams
Depending on who you talk to, bank-owned homes today represent between a third and half of the residential market in metro Atlanta.
Buying a bank-owned home at a discounted price can get you a great deal. But there can be pitfalls along the way. So here are some points to keep in mind:
- The banks are literally drowning in real estate.
They have never before faced a flood of bank-owned homes like this. Remember that in years past, most foreclosures never made it to the courthouse steps because values were almost constantly rising.
Lenders have neither the infrastructure nor the personnel to pull off such a massive sales undertaking.
- As a direct result of banks' mismanagement, bank-owned homes tend to quickly fall into disrepair.
The first thing to go is the air conditioning compressor, followed by the appliances and the copper wiring in the walls. Nothing good ever happens in an empty house. Vacant houses attract vagrants and criminals and things often go from bad to worse.
- Banks are often so disorganized, even they may not know they have a house for sale. It can be months between foreclosure and any organized attempt at sale and even then, the lender often has a completely unrealistic idea of what the house is worth in its present condition.
To make matters even worse:
- The banks will not finance their own homes if they need even cosmetic repairs and most all of these homes do. Few of these homes will qualify for conventional financing.
So why even consider a bank-owned home?
- The banks must sell. They are under pressure from the federal bank regulators to sell quickly for whatever they can get.
And almost nobody wants to buy "the worst house in a slipping neighborhood." So, you can possibly get a great deal.
2. The fact that the bank has neglected a house over a period of months has contributed to its rapid decline in value. During your negotiations, document damages and needed repairs, especially mold or lead-based paint, and submit photos of problems with your offers.
3. The FHA 203k rehab loan is ideal for this situation.
The FHA 203k loan program is HUD's primary program for the rehabilitation and repair of single family properties. You can think of it as an acquisition loan plus a home improvement loan.
The property is appraised "as is" and also appraised based on its after-repair value.
If the numbers work, FHA loans you the money to buy the house, fixes it up and wraps the whole thing into a 30-year fixed rate loan at a great interest rate. The maximum loan amount in the Atlanta area is currently set at $346,250, but is set to be lowered somewhat this fall.
4. The best part is that you can make some improvements based on your own wishes.
For example, you can choose your own colors, floor coverings, kitchen design and even add things like a deck or a fence.
As with many government programs, there is a fair amount of paperwork to file and rules that must be followed. For example, some improvements are specifically prohibited (tennis courts and pools) while others are specifically approved (kitchen and bath remodeling).
5. You'll need an experienced and licensed contractor and you've got to have decent credit, but the FHA 203k loan can be the solution to buying a bank-owned home. Your down payment can be as little as 3.5 percent of the purchase price.
In some cases, you may be able to perform some of the work yourself or you may be able to serve as your own general contractor. However, work can not be limited to nights and weekends only.
At closing, the lender lends you the money to buy the house and, as repairs are made, allows draws to be made against the escrow for repairs. Work is monitored each step of the way so that the buyer knows exactly what level of completion has been achieved.
At the end of the day, the FHA 203k is a unique way to approach today's housing market. For a free HUD brochure on the benefits of this loan, visit money99.com and click on "Contact John."
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John Adams is an author, broadcaster and investor. He answers real estate questions submitted through his website and in this column. For more real estate information or to make a comment, visit www.money99.com.
