Home buyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.
Seth and Crystal Grotzke, both 25 years old, recently bought a bank-owned two-bedroom, two-bathroom townhouse in Edina, Minn., for $110,000—when similar homes in the same development were selling for as much as $131,000. But exactly one day [...]
Home buyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.
Seth and Crystal Grotzke, both 25 years old, recently bought a bank-owned two-bedroom, two-bathroom townhouse in Edina, Minn., for $110,000—when similar homes in the same development were selling for as much as $131,000. But exactly one day before the scheduled July closing, the Grotzkes learned there was a second, unpaid mortgage. Because of the foul-up, the couple was forced to live in Mr. Grotzke’s boss’s basement for more than a month. They finally closed on Aug. 31.
“We knew there would be title issues, but none that would last for that long,” says Mr. Grotzke, an assistant pastor. He adds that buying a foreclosed property is a way for God to “teach you patience.”
Alisabeth and Colin Shearn bought this seven-bedroom house outside of Denver in a short sale.
Lots of home buyers are learning about patience these days. In August, nearly a third of overall housing sales were distress sales, according to the National Association of Realtors, up from 18% in March 2008, when it began tracking such sales. The figure includes both foreclosures and so-called short sales, in which the lender agrees to accept less than the full balance of a mortgage in order to unload the property.
In some parts of the country, such as Bakersfield, Calif., Las Vegas and Lakeland, Fla., distressed properties constitute half or more of all sales. So far this year, there have been nearly 411,000 sales of U.S. properties in some stage of foreclosure, according to RealtyTrac, which publishes a national database of homes in default, auctions and bank-owned homes.
Those numbers aren’t making it any easier to buy distressed property. Bidding wars are erupting for the lowest-priced foreclosures. Experienced investors with cash are elbowing aside first-time buyers who need mortgages. And banks generally sell property “as is,” without the defect disclosures required of other owners. Short-sale buyers, for their part, often face delays of weeks or cheap Acomplia months as they wait to hear back from lenders—and from the institutional investors who bought securities based on the mortgages.
Vandalized Properties
Distressed-property buyers also often have to cope with the fallout from the ruined lives of previous owners, such as vandalized properties and liens from second mortgages, taxes, unpaid water bills, homeowner-association dues and court judgments. For all that, final sale prices often aren’t significantly lower than average in some areas, because the foreclosure glut has also driven down prices for sellers who aren’t in default.
Buyers have to be thoroughly prepared by securing financing in advance and making sure they have a strong stomach, experts say. They should seek out agents with extensive experience and training in distressed property because the transactions are often complicated and time-consuming. Pushing and prodding bank officials, loan servicers and others is a big part of the job.
Colin and Alisabeth Shearn of Cherry Hills Village, Colo., a Denver suburb, managed to snag a seven-bedroom Mediterranean-style house in a short sale for $1,272,000, more than $900,000 below its original listing price in 2007. By the time they bid on the house last February, it had gone unsold for nearly two years and the price had been reduced to $1.5 million from $2.2 million. The couple closed on the purchase at the end of May, and moved in with their two preschool-age children.
“It was nerve-racking,” says Mr. Shearn, 41, a university research scientist. There was a long delay hearing back from the seller’s bank, and the last-minute discovery of a lien from an unpaid water bill—the water was about to be shut off.
But in the end, Mr. Shearn, says he and his wife, 42, a co-owner of a software company, were happy. “We really lucked out to find this house.”
Short sales like the Shearns’ are particularly complicated. Lenders require detailed information about both buyers’ and sellers’ finances, and homeowners generally have to prove hardship. The entire package of documents is scrutinized not just by lenders but by the mortgage investors. Second- and third-lien holders frequently hold up transactions demanding a larger share of the settlement. The average transaction takes four to six months or more, agents say.
Lenders say they are stepping up their efforts to handle short sales. J.P. Morgan Chase & Co. has doubled the number of employees handling such sales, while Bank of America Corp. recently began allowing real-estate agents to submit short-sale documents online, reducing the chance a sale will be stalled. At Wells Fargo & Co., efforts to speed up short sales helped produce a 145% increase in these transactions in August compared with the same month a year earlier, the bank says. Meanwhile, the National Association of Realtors and other groups have recently launched short-sale and foreclosure certification programs for agents.
New Guidelines
The U.S. Treasury Department is expected to issue streamlined guidelines to lenders on short sales soon. Housing-industry leaders say complicated procedures are hindering them from clearing the large inventory of distressed property necessary to return the housing market to normal. Now, only about 20% or so of short sales are successful, according to real-estate brokerage Re/Max International Inc.
Buying a foreclosure is usually speedier than a short sale because lenders already possess the property. But there are other drawbacks. State laws vary considerably with respect to legal procedures surrounding foreclosures. Many states require judicial proceedings for foreclosing on a home that can take more than 12 months, a period during which the home may be vacant or occupied by tenants or squatters. Homes may have appliances, pipes and even electrical wiring ripped out.
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