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Bank Owned Properties Offer an Opportunity for Savvy Buyer - 2008-09-14 |
Are you willing to trade a couple 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 R.E.O.s or "post foreclosures" has swelled dramatically and has assumed center stage for home bargain hunters.
For most of the past 30 yrs, 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 under-qualified 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 under a sea 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 VA post-foreclosure homes offered for sale by the Atlanta HUD office, 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 missing plumbing fixtures, copper pipes, and even in-wall wiring. Air conditioning compressors are also a favorite target of thieves 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 today lenders have finally gotten the message that over-priced homes simply do not sell. There is now significant pressure on lenders to dispose of these "non-performing assets" which can threaten the financial soundness of even large institutions.
In the past, these homes would eventually have been sold at discounted prices to investors. They 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. In case you are wondering, R.E.O. is an acronym banks use for "real estate owned."
To make things worse, today's slow resale market makes these homes much less attractive to investors who might hope to sell the house quickly. Some ofthe bargains being offered are nothing short of remarkable.
How about a nine year old 3 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 recently appraised by HUD for $149,000 prior to any repairs. It sold as a REO in June as-is, needing only paint, carpet and appliances, for $90,001.
Smart home buyers are beginning to find that the pain of performing household repairs and the hassle of dealing with a lender as the seller can be more than offset by the reward of bargain pricing.
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. At Prudential Georgia Realty, each office features at least one agent who specializes in REOs.
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. They can't wait forever - more REOs are added to inventories daily.
While all this may sound too good to be true, there can be 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 only after a ninety day marketing period.
* Lenders are notorious for failing to reply to written offers. Selling at a loss is painful for the lender, and no one wants to make the final decision. It's not unusual for written offers to go unanswered for 2 weeks or more.
* These homes are typically sold as-is, where-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 up front.
An experienced agent can assist buyers in overcoming these hurdles.
But if you are hoping to pick up a steal of a deal in Atlanta's residential real estate market today, don't overlook the possibility of buying a post foreclosure home.
Next week, I'll give you some tips for negotiating with lenders.
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