Real estate matters

Real Estate Matters: Buying a foreclosed house, dividing property in a divorce

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, October 2, 2010

Q. I have been looking at a house in my neighborhood that went into foreclosure and is being sold by the bank. I have seen the property, and its current condition is just a framed-out shell. But my family and I immediately fell in love with it. It was new construction, and the builders ran out of money to complete the work.

The price of the house is $59,000. I discovered that upon completion, the intended price was to be around $550,000.

We have been trying to figure out how to buy this house given our financial condition. It will be at least 16 months before we emerge from bankruptcy, and I fear that either the house will be sold or taken off the market. I have found a job for $90,000 per year, plus bonuses.

Since I started work in May, I have saved $7,000. I realize that I will have to do plenty of work on the house, but I am skilled and have family and friends who are contractors and are willing to help. Is there any advice you have for me since I now am earning money and paying off my debts and saving again?

A. The problem you're going to have is getting a mortgage if you haven't been out of bankruptcy for at least three to five years. You most likely will have a hard time getting any kind of financing to buy the home in its unbuilt condition. Even if you pay cash for the house, you'll have a difficult time getting a construction loan to finish it. You may need to get out of bankruptcy first.

While it's unlikely you will find a lender to assist you, you may be able to raise the money from family members to buy the house. I'd normally recommend seller financing -- which is generally a long shot -- but it's unlikely to work for you because this is a foreclosure and the seller is a bank.

It's only a deal if it is the right house for you at the right price, on the right terms and at the right time for you.

Here are a couple of things you should consider. First, what will it cost to finish the house? That includes whatever framing, roofing, plumbing and electrical work remains to be done, as well as finishes to the house. You may find that the cost to finish the house will break your budget.

Second, if you do find the time, labor and money to finish the construction, will you be able to afford to live in and maintain the house? People often find a "bargain" in real estate but forget to consider the costs that come with a large home, including higher utility, maintenance and insurance costs, and larger property tax bills.

You need to make sure you've considered all your options and obligations for the years to come. It's great that you're saving money, but you need to decide whether you will need that money for college savings for your children or your retirement.

If you still want to press ahead, I'd spend some time chatting with lenders who can help you figure out whether you can make this work. More important, be sure to work with the lender to calculate whether owning this house will fit your long-term financial obligations and budget.

If you find that owning the property meets your long-term financial goals, then you'll want to talk to some local banks that keep loans in their portfolios and that may be willing to give you a loan, if not now, perhaps in the near future. Your local bank may be slightly more flexible with lending requirements than some of the national lenders.

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