Closing on foreclosures: Inventory down, but deals still out there

Some homebuyers associate foreclosures with bargain-basement prices and oodles of profits. Others view the prospect of a distressed-home purchase as rife with potential pitfalls, including hidden rehab costs and multiple title liens.

The truth lies somewhere in the middle.

Although the number of distressed properties on the market has dwindled, those that are available can provide significant cost savings – if you know what to look out for.

Mecklenburg County still offers great deals to the savvy buyer, according to RealtyTrac. The median sales price on houses that were bank owned or actively in foreclosure was $98,200 in August. That’s a 50 percent discount from nondistressed homes in the county, for which the median sales price was $195,000 in the same month.

The median price is where half sold for more and half sold for less; medians are more typical of market conditions than average prices, which are skewed higher by a relatively small share of upper-end transactions.

But reaping the benefits of a discount is great only if you can find it. Foreclosures and short sales accounted for 5.3 percent of closed sales last month, down from 9.4 percent in September 2013. Distressed sales made up 15.3 percent of such sales in September 2012, down from 20.9 percent in the same month of 2011, according to the Charlotte Regional Realtor Association.

Foreclosure inventory falls

In addition to the recovering economy, local Realtors give various reasons for the decline in inventory.

Todd Lynch, a broker and owner of Lynch Realty of Charlotte, said banks are holding onto their distressed properties. When a house is in pre-foreclosure it is considered a nonperforming asset, he said. But once the bank forecloses, the property becomes a debit on the bank’s balance sheets that offsets capital reserves. In addition, he said, a flood of foreclosed properties would depress home prices, something the banks want to avoid.

But prospects are still out there, according to Nancy Braun, owner and broker at Charlotte-based Showcase Realty. She says the real estate investment trusts that bulldozed Charlotte a couple of years ago have since curtailed some of their spending, opening up the doors for individual investors.

“The market in Charlotte is not as frantic as it was,” she said. “There’s less inventory but there are still opportunities to purchase foreclosures.”  Those that buy foreclosures typically save 20 percent to 40 percent off the market value of similar homes, she said.

That’s why it’s important to have realistic expectations. Eric Layne, a Charlotte Realtor, has bought dozens of foreclosures in his career. Layne also has received a distressed property expert certification from the Mingle School of Real Estate in Charlotte.

“I think the big mistake is people think they can come into this market and get a house for pennies on the dollar,” he said.

Layne said foreclosed properties have hit the local market in waves, the first being when subprime loans went into major default from 2008 to 2010. Then, the weak economy pushed many homeowners over the edge, leaving them unable to keep up with their mortgage payments.

The third wave, he said, “has yet to come and rear its ugly head,” referring to individuals who signed on for adjustable rate mortgages in the mid-2000s. “If those people didn’t reset,” he said, “they were caught with readjustments.”

Timing a jump

Layne says a correct assessment of the time needed to buy a distressed property is essential to those mulling a jump into the market. Buying a property via a short sale, meaning the seller has to get the mortgage holder to agree to take less than he or she owes on the property, can be time-consuming. The buyer is unlikely to move into the house promptly, as negotiations can take a long time. A short sale can take anywhere from six to nine months to complete, Layne said.

Perry Butler, office manager for Benham Real Estate Group in Concord, agrees. “Short sales never happen quickly,” he said.

On the upside, the seller is usually motivated to avoid a foreclosure on his credit report and the lender can avoid the costs associated with owning the property by agreeing to a short sale.

On the downside, the buyer needs to ascertain if there are additional liens on the home, such as a second mortgage, overdue property taxes or unpaid balances from renovation work.

“An $18,000 lien on a house that put new windows in can wipe out any profit (for the buyer),” said J.C. Underwood, executive director of the nonprofit Metrolina Real Estate Investors Association.

An inspection of the property is also important.

“Be wary of the conditions of the home,” Lynch said. “Foreclosure means the occupying owner was in distress. That tells me they didn’t have money for maintenance.”

Auction competition fierce

Buying a property at auction on the courthouse steps can be lucrative but is not for the faint of heart, local Realtors agree. The competition can be fierce, as bidders are often professional real estate investors.

“I wouldn’t recommend (buying at auction) for the owner-occupant,” Butler said. “You’re competing with hedge funds who can outbid with cash on hand.”

Braun said buying a property at auction also brings with it the risk of liens. There is no time for an inspection, she said, and the new owner may have to contend with evicting the current occupant. “At an auction, you take (the property) with all the blemishes,” she said.

And, in North Carolina, the mortgage borrower has a 10-day right of redemption after the auction sale by paying what is owed to the lender, plus any sale costs. Furthermore, any party may enter an upset bid in the same period by submitting a deposit of at least 5 percent of the bid to the county clerk, according to RealtyTrac.

Buying from the bank

Buying a real estate owned property can be less nerve-wracking. This is the final step of a foreclosure, as the property has reverted back to the mortgage lender after an unsuccessful auction.

“It’s an easier scenario,” Braun said. REOs generally offer clean titles and are empty of previous owners, she said. In addition, they offer the buyer the opportunity to inspect the property.

However, REOs often come “as is,” meaning the buyer will be responsible for costly renovations. But, REOs can be a good deal for those willing to put in sweat equity for instant appreciation, and they offer buyers a chance to move into a neighborhood they otherwise couldn’t afford, Braun said.

Due diligence is the key to successfully buying a foreclosure, Realtors say.  Braun said prospective buyers should arm themselves with professionals.

“Foreclosures are a different animal,” she said. She suggests partnering with an agent that has experience dealing with distressed properties, an attorney and a home contractor.

“Buyers need a successful REO agent to critique the home and ask the bank to improve the property,” Lynch added.

Education is also important. Underwood suggests joining a trade association to get training in the foreclosure process.

“Learn the business,” he said. “It’s not for the weak of heart but it’s not scary either.”