By Chris Churchill, Times Union, Albany, N.Y.
May 15—The foreclosure spike of the last three years has been a disaster for the families who lost homes and the neighborhoods hit by an abundance of vacant and rotting properties.
That’s one side of the coin.
Here’s the other side: Foreclosed-upon homes are an opportunity for the thousands of wannabe buyers who had been excluded from home ownership by soaring prices that outpaced income growth.
But are foreclosures safe to buy?
That depends on how you buy them.
Generally, there are two well-worn paths to purchasing a foreclosed home. The first is at auction, on the steps of a courthouse. The second is from a bank that has placed a home on the open market and is typically represented by a REALTOR®.
Experts consider the first path, an auction purchase, fraught with risk, particularly for the person looking to actually live in the home.
The biggest problem: The buyer probably won’t get a chance to inspect the home before the auction and therefore can’t identify potential issues with the property.
That is particularly problematic when you consider that a foreclosure may have been vacant for several years, or could have been the subject of an angry dispute. Pipes could have frozen and burst. Walls may have been kicked in. Bats might be making the kitchen their happy home.
“And these are going to be your problems, not the bank’s,” said Scott Dillon, a bankruptcy attorney at Tully Rinckey in Colonie with experience in foreclosure transactions. “You’re buying as is.”
There are other potential messes. The home, for example, might be occupied by a tenant who doesn’t intend to leave. You will be responsible for a time-consuming eviction that might also be emotionally draining.
Also, the property’s title might not be clean. There could be liens or other legal complexities. Or the home owner could file for a last-minute bankruptcy, negating the foreclosure and your purchase of the home—even if you’ve already handed over your cash deposit.
The potential headaches explain why few foreclosed houses are purchased at auction—despite the deals available there. Investors and house flippers dominate the auction scene; home-buying families are rare.
Usually, though, nobody buys a foreclosed home at auction, allowing the bank to take full and legal ownership of the title.
The bank then puts the house on the market for an amount that’s 20% or 30% above the minimum “upset price” of the auction, and hires a REALTOR® to handle the sale.
Those homes carry far less risk. In fact, experts say such purchases are similar to the buying of a non-foreclosure home. You’re just buying from a bank, rather than a home owner.
The biggest difference: maintenance.
A bank might not have been vigilant about upkeep while the property was vacant. And it’s likely the departing residents stripped the house of anything they could sell.
“I don’t think I’ve ever been in a foreclosure where the appliances were left in the house,” said Kevin Clancy of Clancy Real Estate in Guilderland.
Deferred maintenance might make a mortgage more difficult to secure. Clancy notes that Federal Housing Administration loans forbid even minor problems such as peeling paint.
“In a typical foreclosure, there’s a pretty good chance that there’s peeling paint,” Clancy said. “Then, the buyer has to go in and do the work.”
But that elbow grease—whether before or after the sale closes—has its reward: The NATIONAL ASSOCIATION OF REALTORS® says foreclosure homes sell for 20% less, on average, than typical homes.
Last year’s “robo-signing” scandal, in which banks were found to have cut corners on mortgage paperwork, made some potential buyers wary of foreclosures. But expects say the risk is minimal, particularly if the buyer acquires title insurance.
“If the house is listed on the market, it should have clear title,” said Walter Molony, spokesman for the national REALTORS® group.
Still, as with any real estate transaction, hire an attorney to make sure the transaction is smooth and the title is clear.
So how many foreclosure homes are there?
In the Capital Region, relatively few. A search last week of the area’s Multiple Listing Service found just 44 homes on the market listed as being owned by a bank or mortgage holder.
Clancy said foreclosures used to be concentrated in struggling sections of cities like Troy and Schenectady. But that is no longer true.
“Now, we’re seeing them everywhere—and with all walks of life,” he said.
Finding those homes is relatively easy, although it can be hard to detect a foreclosure by its appearance from the street. Some real estate websites, for example, allow users to filter searches for foreclosure properties.
Many observers expect the number of foreclosures for sale in the Capital Region to increase. That’s because the state’s chief judge last year imposed rules requiring the verification of all foreclosure paperwork, a move that has created a backlog of foreclosures that are still in the works.
Nationally, the foreclosures are already a big part of the market.
Indeed, the NAR says nearly a third of all homes sold in recent months are foreclosures.
And those distressed properties, as they’re called, are playing a role in bringing down median sale prices.
They are also making things more difficult for more traditional home sellers. Buyers, after all, are unlikely to pay full value in markets flooded with cheaper alternatives.
As Clancy asked: “Who doesn’t want to buy a house for 80 cents on the dollar and get a bargain?”
Reach Chris Churchill at 454-5442 or firstname.lastname@example.org.
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