One place to look for a house for sale at reasonable terms is the foreclosure department of a local bank or savings and loan association. Many lenders have a growing inventory of foreclosed houses on their hands and are glad to bargain with a capable buyer.
The pace of foreclosures is picking up around the country, especially on homes with second mortgages. When a two or three-year-old second mortgage falls due, a homeowner may find that he cannot raise the money to pay it off, nor can he sell his house. So the property passes into the lender's hands.
Some homebuilders have also had to turn over newly built, but unsold, houses to the bank.
A house in foreclosure is traditionally auctioned on the courthouse steps to the highest bidder. In most cases, the lender buys the property for the price of the defaulted mortgage plus foreclosure costs.
If the owner defaulted on a relatively small second mortgage, and if you can assume his low-rate first mortgage, it might make sense to attend the foreclosure sale and outbid the second-mortgage lender for the property. You will need enough cash to pay off the second mortgage, the foreclosure fees and any delinquencies that exist on the first mortgage. That gives you the house for roughly the cost of the first and second mortgages. The former owner's equity is wiped out.
You can also bid just above the lender's price on a first mortgage. Charles Nichols, vice president of mortgage investments at Hudson City Savings Institution in New York, says that he has seen a lot of worthwhile houses sell at bargain prices. But have your financing lined up in advance of the sale. You'll typically have to pay 10 to 15 percent of the price up front, and close on the house in 30 to 60 days.
To buy directly from a bank or S&L, make an appointment with a senior mortgage officer, advises Irving Price of Hudson Michael realty in Hudson, N.Y. Take a financial statement showing that you can afford to buy a house on reasonable terms. Ask the mortgage officer for a list of his foreclosed properties, or those close to foreclosure, and visit them all. Look at the properties of several lenders, so you'll have an idea of what's on the market.
Banks will bend over backward to arrange a sale between you and the present owner, in order to avoid foreclosure.
When the bank already owns the property, it is especially interested in selling to an individual rather than a speculator, and will usually agree to attractive financing, says Anne White, vice president of Downey S&L in Costa Mesa, Calif. Depending on the lender's flexibility, many combinations of terms are possible, including mortgage rates under 12 percent, low downpayments and no closing costs.
Work out, in advance, what you'd like to pay, and on what terms, instead of asking the bank what it's willing to offer. If you are no good at bargaining, ask a lawyer to bargain for you.
There are two main risks with respect to foreclosed property:
(1) The person who previously owned the house may have a grace period, during which he can reclaim the property simply by bringing the defaulted mortgage up to date. Depending on state law, this grace period might run as long as one year, according to Dal Bennewitz, staff vice president of the U.S. League of Savings Associations.
It is not usual for a house to be reclaimed after a foreclosure sale, but it is always possible. You might ask the bank or S&L to show you only those foreclosed properties on which the waiting time has expired. Or, you might rent the house from the bank, with an option to buy as soon as you can get clear title.
In states using deeds of trust instead of mortgages, there may be little or no waiting period after the foreclosure sale itself. But if you buy from an owner before foreclosure and assume his mortgage, the lender may have the right to demand that the mortgage be paid in full. Talk to a lawyer about the legal ramifications of foreclosure buying before you enter the market.
(2) A foreclosed house may be in poor physical shape. The former owner couldn't afford to keep it up; also, it may have been vandalized while sitting empty. The price will be dropped to reflect the house's present condition, but you'll need some cash on hand to fix it up. (Use an estimated price of repairs when negotiating with the bank or S&L for a lower price and lower downpayment.)
As long as the house is in a good neighborhood and repairs are not too costly, it may present an excellent -- and classic -- investment opportunity. You pay a price that reflects its present, poor condition, fix it up, and eventually resell it at the neighborhood's higher, prevailing price.