Real Estate
Great Homes at Deep Discounts
Rock-bottom prices and mortgage rates are luring buyers back into the market.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, May 2009
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Home prices may not have hit bottom quite yet, but they are finally low enough to draw bargain hunters. The national median home price has fallen 26% since its peak in early 2006, according to Fiserv Lending Solutions, a home-price research firm. Sales are especially brisk where prices have dropped sharply and foreclosures are rampant-in California, Nevada, Arizona and Florida-partly because foreclosures put pressure on traditional sellers to cut their prices, too.
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Nationwide, nearly half of all sales in the fourth quarter of 2008 were "distressed"-mainly foreclosures, but also sales by homeowners selling for less than they owe on their mortgage-according to the National Association of Realtors (NAR). Foreclosures will continue to rise with the jobless rate and the next wave of subprime-mortgage delinquencies, despite relief efforts by lenders and the Obama administration. And most experts don't expect home prices to start recovering until 2010; in fact, Fiserve forecasts that the median price will fall by another 14% in 2009. That, plus the dour economy, will keep many buyers at bay.
Still, it's a good time to snag a bargain if you're confident in your job prospects and you don't plan to sell for at least five years. The NAR says homes haven't been this affordable since the 1970s: Interest rates on 30-year fixed-rate mortgages are hovering near 5%, and with so many homes for sale, you can be as picky as you like. If you're a first-time buyer and you close on a home before the end of November, you'll be eligible for an $8,000 tax credit, too.
Buying from the bank
Foreclosure begins with a homeowner's failure to make a mortgage payment and ends on the courthouse steps, when the home is auctioned off to the highest bidder. If bidders fail to meet the bank's minimum (usually the balance of the mortgage), the bank will buy back the home and sell it as a real estate owned property, or REO.
For most home buyers, REOs provide a less risky route to a bargain than homes sold earlier in the foreclosure process, which are strictly "buyer beware" properties that attract seasoned investors prepared to tackle major rehabbing. Even they get burned sometimes by legal encumbrances and liens that transfer with the property to the buyer.
With an REO you get a clean title, and you don't have to deal with a harried homeowner, a difficult-to-evict tenant or, in some states, a mandatory redemption period during which the previous owner can try to get the home back. You'll still get a deal; how good it is depends on the market. The city with the largest discount compared with median price on REOs is the Las Vegas suburb Henderson, Nev., at 33%, according to a survey by Trulia.com, a real estate Web site, and RealtyTrac.com, an online foreclosure marketplace.
Dan Wittman, 39, and Melissa Swearingen, 35, got a great deal on an REO in Phoenix, where inventory, fueled by foreclosures, is high and prices fell by 34% last year. They had to relocate from Denver for Dan's job, and fortunately, they had no trouble selling their home because Denver's housing market is one of the healthiest in the nation. The couple's Denver home, in a golf-course community, sold quickly for just $1,500 less than its list price of $290,000.
In Phoenix, they looked at more than 30 homes with Ken Reid, an exclusive buyer's agent. Reid says that these days it's not unusual for buyers to look at as many as 40 to 70 homes. Wittman and Swearingen spotted a 3,000-square-foot, five-bedroom REO that had been on the market for six months and was listed for $240,000. When it was new, in 2005, it sold for $429,000. The couple acted fast to beat the competition and offered full price plus $700-as well as a 20% down payment-to sweeten their bid. The home was appraised at $275,000.
Although you can have REOs inspected before you sign a purchase contract, they are sold "as is," so you can't negotiate the price based on the home's condition. The inspection merely gives you an out. Disgruntled homeowners who lost their property may have stripped the home of major appliances or even trashed it. While the home is vacant, it may be vandalized or inhabited by squatters or small animals. Turned-off utilities may lead to broken pipes and water damage, mold, mildew and smelly carpets. Swearingen and Wittman spent about $9,000 to replace missing appliances, numerous light fixtures and the upstairs carpet. But their home's total price was so good they could afford to add a swimming pool.
Researching REOs
Visit the Web site of your local multiple-listing service (or ask your real estate agent) and look for listings labeled "REO" or "bank owned." RealtyTrac.com and Foreclosure.com offer listings of homes in foreclosure (both are available by subscription with a one-week free trial). You can see each property's loan history, which often reveals what the previous owner paid for it at the top of the market. For Fannie Mae's REOs, visit HomePath.com; for Freddie Mac's, go to HomeSteps.com.
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