By Alejandro Lazo
Washington Post Staff Writer
Saturday, February 21, 2009
Keith and Cynthia Antaya spent the years of the housing boom renting, unable to fathom how they could afford their own digs during the market's dizzying escalation.
As Fairfax County Public Schools employees, he a special education teacher and she a school psychologist, renting seemed more in line with their income than paying a mortgage.
Then came the crash, and a wave of foreclosures sent home prices tumbling, particularly in once-fast-growing markets such as Northern Virginia's western suburbs. Suddenly homeownership was a possibility for the Antayas, who focused their hunt on foreclosed properties. After a five-week search, the couple decided on a Woodbridge house that cost about $200,000. It needed some new paint and new floors but was otherwise in good condition.
"The kitchen was pretty much all brand new with brand-new granite countertops," Keith Antaya said. "We were pretty pleased with what little we ended up having to put into it."
The Antayas are two beneficiaries of the housing bust, and there are many more like them as investors, first-time home buyers and others plunge into the market of "distressed" properties: homes sold at auctions, repossessed by lenders or still in the hands of homeowners facing foreclosure. The National Association of Realtors said earlier this month that distressed sales accounted for 45 percent of all transactions in the fourth quarter of 2008, a factor that contributed mightily to falling home prices nationally.
Housing experts said buyers of such properties will play a key role in any kind of turnaround, helping pare the glut of vacant homes sitting on banks' books even as the Obama administration forges ahead with its plan to help homeowners in peril of losing their properties.
"It is very important that those homes get recycled back into some kind of productive use," said Eric S. Belsky, executive director of Harvard University's Joint Center for Housing Studies. "To the extent to which the homes are purchased by people intending to live in them, or improve them and rent them out, it can be a very important part of bringing the market back into equilibrium."
But while there are opportunities for those willing to scavenge the wreckage of the downturn, buying a foreclosed property or arranging a sale with a homeowner and his lender does not guarantee a bargain.
"Everybody thinks that by chasing foreclosures they are getting a good deal, and a foreclosure is not necessarily a good deal," said Mark Goldman, a California mortgage broker who teaches real estate finance at San Diego State University. "I strongly urge consideration and a careful, measured evaluation of the value of a property."
A variety of factors can come into play in shopping for a distressed home. Those owned by lenders are often sold in "as is" condition, and most require some kind of renovation or repair. Buying from a bank can be slow going, particularly if the lender is a large institution with a big inventory of foreclosed properties.
In foreclosure hot spots such as Prince William County, multiple bidders often make offers on a property, driving up the price. And with home values still in a freefall, there is no guarantee that a home's worth will appreciate significantly in the near term.
Purchasing a home at an auction or directly from a distressed homeowner comes with its own potential troubles. At a foreclosure auction, buyers rarely get the opportunity to inspect the property before they make an offer. They may also inherit the claims other creditors have made against previous homeowners, such as a home-equity line of credit, a mechanic's lien and back taxes that have not been paid.
Buying directly from a homeowner in distress carries that same risk. Additionally, a short sale, in which the lender agrees to let the owner sell the home for less than the balance of a mortgage, takes a certain level of sensitivity, tact and patience, real estate experts said. Negotiating a deal that will work for both homeowner and lender often takes time, flexibility and a willingness to work through what is often someone's personal financial nightmare.
"It takes some nerve to do that, but if you do, you can actually save that individual a lot of money and salvage their credit," said Danielle Babb, a real estate investor and co-author of the book "Finding Foreclosures."
"Sit and talk with them, meet with them, and let them see you are a real person."
If you're considering shopping for distressed property, first understand your goals. "You ask yourself, 'What is the basis for me buying this property?' " said Robert H. Hillman, a Rockville lawyer who has helped banks sell foreclosed properties and house hunters buy them. Is this an investment intended to be spruced up and sold for a quick profit? Am I going to rent this home out? Do I intend to live here?
"Secondly, you have to decide on the neighborhood where you are buying and then you have to figure out the financing," Hillman said.
For those who want a home to live in, the most common avenue is buying directly from a financial institution that has already foreclosed on the property. Such properties are known as "real estate owned," or REO, properties.
There are services that sell lists of foreclosure properties. Web sites such as RealtyTrac and ForeclosurePoint allow users to search for homes by geographic parameters such as Zip code. Some limited information is available free.
Fannie Mae recently launched the searchable site HomePath for its REO properties, and Freddie Mac has HomeSteps. Some Federal Housing Administration foreclosures are listed at http://www.homesales.gov.
Another route is working with a local real estate agent who specializes in REO properties, many of whom are the listing agents for banks or other lenders. Once a target area is identified, the search begins.
Stephen Greisiger, 43, a news photographer for the Pentagon Channel, chose Woodbridge as his target area because he already lived in Prince William County and was aware of the many foreclosed properties there. He spent weeks seeing dozens of REO homes with a real estate agent before picking a four-bedroom, two-bathroom house on El Dorado Drive, built in 1970. There was an in-ground pool and a big yard. But for $173,000, the property was definitely a fixer-upper.
"There was writing all over the wall. It was just scribble," he said. "It took me 12 hours to clean the grease out of the kitchen."
Much of the drywall had to be replaced. The ceiling was flaking. The windows would barely open. The floors were stained.
"I didn't know how people lived in that house," Greisiger said.
The home's condition did not deter bidders. The bank had advertised the place for $129,000, and Greisiger found himself submitting his bid with 10 others. His offer came in well above the asking price, a situation common for those hunting for foreclosure deals these days.
Making the offer was a calculated risk, Greisiger said. As he figured it, his mortgage would come out to about $1,250 a month. After about $40,000 worth of renovations, he figured, he could find somebody to rent it for about $1,600 a month if he had to move. And in five to seven years, he said, he thinks his total investment will double. So he felt confident about the offer, which was accepted in June. Recently, the home appraised for $210,000, he said, after some of his renovations, he said. He refinanced for a lower interest rate and a monthly mortgage of about $1,125.
"You don't want to overspend," Greisiger said. "It is a very delicate game, and so you have to be very comfortable with the math in your head, confident, and you have to be willing to walk away."
Perhaps the biggest pitfall in buying a foreclosed property is determining the amount of repairs that need to be done to get it in livable shape. Conditions range from dilapidated to pristine, but most need some work.
On a recent afternoon, John Thompson, a real estate agent who specializes in REO properties, drove his Lincoln Town Car through several Woodbridge neighborhoods, visiting half a dozen repossessed homes in search of a property for his most recent clients: a young, professional couple whose budget was $400,000 or less.
After unlatching the padlock of each house, Thompson bellowed a loud "hello." He does this because he has caught intruders who have slipped in through a back window or door. His experience working with the county's foreclosed homes has made him cautious. He always inspects the first floor, then the second floor, then the basement, giving any intruders a chance to flee. He sniffs the air deeply, searching for any signs of must or mold.
The selection that afternoon varied. Some houses were overrun with mold. Others had holes punched in the walls. Many were missing appliances such as a stove or refrigerator. A few were just like new.
The majority were permeated with a stopped-in-time sense. The remnants of a hurried life were strewn about: work boots in an upstairs bathroom, flannel shirts and floral dresses hanging in a basement closet, a "Happy Birthday" sign from a child's birthday party left hanging in a kitchen.
"One family's loss is often another's gain," Thompson said.