Foreclosure sales: Potential bargains can carry big risks
By Steven Harras,
The vacant, dilapidated split-level rancher with the broken fence and dangling gutters has long been an eyesore to neighbors on Montrose Street in Alexandria. But Glen E. Scheirer saw it as an opportunity to snap up a dramatically discounted house directly across the street from his son and daughter-in-law, who have a son and another child on the way.
Last May, Scheirer made an all-cash offer of $375,000 for the foreclosure, which he figured would need about $100,000 more in repairs. Fannie Mae accepted the offer, and Scheirer began carting his belongings — including newly purchased appliances and furniture — from his Chantilly home to his son’s garage in preparation for the impending move.
But last month, Fannie Mae canceled the deal because it couldn’t determine whether the foreclosure had been done properly, and Scheirer is back to square one.
Scheirer has had first-hand experience with the many problems that confront people trying to buy foreclosures. Indeed, purchasing a bank-owned house can be an enormously frustrating experience, marked by unreturned phone calls, unforeseen tax bills, unexpected repair jobs, undisclosed title disputes, liens and legal obstacles.
“The most frustrating part of it was that the seller seemed to be so disinterested,” said Scheirer, 64, who recently retired from his job as a chemical engineer at Exxon Mobil. “I understand that Fannie Mae is selling many, many homes. But I am not sure that they have broken things down into manageable sizes. They could do a better job of handling the process. I’m disappointed.”
For its part, Fannie Mae acknowledged the difficulties it encounters with foreclosed properties.
“As with any real estate sale, snags occasionally occur. In this case, outstanding title issues prevented us from being able to convey insurable title,” Fannie Mae spokesman Andrew Wilson said in a statement.
“We extended the contract to give us more time to work at a cure, but ultimately the transaction could not be completed,” Wilson added. “Fannie Mae sells its inventory of properties on www.HomePath.com, and our goal is to sell to owner occupants as often as possible so that neighborhoods can stabilize and recover.”
House hunters seeking this affordable option have yet another obstacle to face: In the Washington area, the supply of foreclosures is dwindling fast amid growing demand.
According to the Bethesda-based data firm RealEstate Business Intelligence (RBI), the number of bank-owned active listings dropped from 2,272 at its peak in March 2009 to 194 last month. And from January 2012 to January 2013, the number of days on the market for foreclosed houses in the region fell from 49 to 30, an indication of strong demand.
Foreclosed properties at the entry-level price point are particularly popular. A bank-owned Prince George’s County home recently sold for $110,000, according to RBI, 66 percent over its $66,000 list price.
“The paperwork was a nightmare. Some of the financing rules are harebrained and take weeks and weeks of documentation,” said Wayne Crews, who in 2010 bought a Fairfax townhouse in foreclosure for $285,000. “But it ended up being a very good decision for me.”
Crews, 49, said that before the closing, he was pleasantly surprised to see that Fannie Mae had made several improvements — new carpeting, fresh paint and new kitchen appliances. “That wasn’t just the icing on the cake. That was a whole new cake,” he said, adding that the property has recently been appraised at $365,000.
Getting a deal through is rarely a slam dunk, experts say, so it’s important for buyers to enter the process with their eyes wide open. Here is a look at what to expect when attempting to purchase a bank-owned house:
●Foreclosed houses are typically sold as is. Foreclosed properties have often been abandoned for months — or years — and can fall into disrepair. They also can become targets of vandals and thieves.
Get a thorough home inspection. Be sure to look for mold, cracks in the drywall and especially for whether the plumbing is intact. The buyer is often required to conduct and pay for all inspections, including those typically handled by the seller. The buyer may be required to pay for the inspections in advance and will not be reimbursed if the sale does not go through.
When damage is found, it is usually the sole responsibility of the buyer to pay for any repairs and renovations. There is almost never any haggling with the bank over replacing the bathroom fixtures or kitchen appliances, or any negotiations for lowering the price to make up for the additional expenses incurred to make repairs.
●Real estate experts advise that before making an offer on a foreclosure — also called real estate owned (REO) — buyers should research recent sales of comparable homes in the neighborhood. In looking at houses with similar square footage, numbers of bathrooms and bedrooms and amenities, the buyer can better quantify the value of the foreclosure.
Once they determine they do want to make an offer on an REO, buyers should be prepared to move fast, because there are often multiple bidders. “There is not a lot of time for existential pondering when buying a foreclosure,” said Morgan Knull, a Washington-based real estate broker with Remax Gateway.
●The buyer should have a home inspector at the ready who is prepared to work on relatively short notice. The buyer’s financing also should be arranged before an offer is made.
Because the process of buying and renovating foreclosures is so complex, time-consuming and expensive, more and more large private-equity firms, such as the Blackstone Group, are rushing into the foreclosure market as a form of investment, as opposed to individuals and families who are seeking a primary residence.
David Kessler, national director of the commercial estate practice at CohnReznick, a national accounting, tax and advisory firm, said that during the past year, banks, as well as Fannie Mae and Freddie Mac, have been selling large portfolios of REO homes to private-equity investors who are looking to convert the properties into rental units.
The federal government has encouraged private investors to jump into the REO market through programs such as the REO-to-Rental Initiative of the Federal Housing Finance Agency (FHFA). When it launched the program in February 2012, FHFA said the REO initiative was designed to encourage qualified investors to purchase pools of foreclosed properties with the requirement to rent out the properties for a specified number of years. The government hoped the rental period would provide relief for those local housing markets that were hit particularly hard during the financial crisis, including Chicago, Atlanta and Miami.
Kessler, who is based in Bethesda, predicts that private-equity investment groups will continue to move heavily into the REO market, buying hundreds, sometimes thousands, of foreclosed homes at a time at greatly reduced prices. This trend, combined with lower mortgage rates, rising housing prices, an increase in short sales and government programs designed to help distressed homeowners modify their mortgages (such as the Home Affordable Modification Program and the Mortgage Forgiveness Debt Relief Act, which was recently renewed by Congress for another year), may also mean there will be fewer opportunities for individual buyers to purchase individual REO properties.
While REO opportunities still exist in some parts of the country where there is higher unemployment and other challenges to home ownership, “I’d say the window is closing for individual investors looking to get a great deal on a foreclosure in certain markets experiencing a faster recovery,” Kessler said.
This might be especially true in the Washington area. According to a recent report by RealtyTrac, the region is one of the worst places in the nation for buyers seeking to purchase a foreclosure. The RealtyTrac report cited the relatively limited foreclosure inventory and overall home inventory in the region, the average foreclosure sale price and the average foreclosure discount percentage.
In another study, the Center for Regional Analysis at George Mason University and RBI found that, as a percentage of all sales, distressed-property sales in the Mid-Atlantic region (which includes the District, Maryland and Virginia) are falling. The number of active distressed-property listings in the region is at its lowest level since 2009, the study found.
The report said that foreclosure sales’ share of all sales fell in 44 of 45 jurisdictions in the Mid-Atlantic region last year, with short sales becoming more prevalent than foreclosures. Moreover, from January 2012 to January 2013, the number of foreclosure sales in the Washington area dropped 43.8 percent and the inventory of bank-owned homes dropped 60.5 percent.
Snags kill a deal
The deal on the house that Glen Scheirer wants was snagged by a series of legal complications, including judgments against the previous property owners for various zoning and housing code violations and botched paperwork, said Knull, his real estate agent. The problems prompted Fannie Mae to delay the sale several times and ultimately cancel the contract to sell the property.
The most recent obstacle came in November, when Scheirer was informed that the law firm that had handled the initial foreclosure of the property had gone out of business. As a result, Fannie Mae was unable to certify that the foreclosure had been done properly and in full compliance with all Virginia laws, such as the legal requirement that notice of the foreclosure sale be advertised.
Waiting to find the necessary documentation, Fannie Mae extended Scheirer’s contract to buy the house from Nov. 1 to Nov. 30. This was extended yet again, this time until Jan. 15. In the meantime, Scheirer had already begun moving his furniture and possessions and storing them in his son’s garage, across the street from his expected future home. He had also made a $10,000 down payment, which he had placed in an escrow account.
Finally, on Jan. 14, the day before the closing, Fannie Mae’s listing agent informed Scheirer that the missing documents still had not been located and that, as a result, the agency was canceling the contract. Scheirer would need to start the buying process all over, with no guarantee that his offer would be accepted.
Months of negotiations, offers, counteroffers, inspections, contracts, addenda and extensions went down the drain.
“This is a common type of mistake,” said Steven Sushner, an attorney and president of District Title, a real estate settlement and title insurance company with offices in Washington, Virginia and Maryland. He strongly cautions people who are looking to buy a foreclosure to be diligent in researching and securing marketable title to a property.
Sushner advises buyers not to rely solely on the seller’s title company. “It is a very complicated process. You should ask questions and use people who have your best interests in mind,” he said. Sushner notes that foreclosure laws vary from state to state. He recommends that buyers rely on local real estate lawyers and other experts to determine if the foreclosure and repossession process complied with state law.
In the meantime, Scheirer’s son, Glen A. Scheirer, said he still hopes his father will be able to move into the abandoned house across the street. He said he has called and e-mailed anyone who will listen at Fannie Mae. He has even contacted a congressman.
“This process is ridiculous. The federal government is broke and my father is ready to hand them $375,000 in cash to take an eyesore off their hands that we will fix up with our own sweat equity and money,” the younger Scheirer, 32, said.
The elder Scheirer is “still going to get this house,” he said. “My dad is going to live across the street from me, my wife and his grandchildren.”
Steven Harras is a freelance writer.