This article is written from a homebuyer's perspective and is based on my experiences with house-hunting in the Atlanta real estate market over the past year and a half. As such, it represents my own personal tips and pointers (not legal advice) and hence does not reflect the official views of Clickscape.com. Potential buyers interested in purchasing an Atlanta foreclosure should seek the advice of a real estate professional.
According to the Atlanta Business Chronicle, Atlanta ranked 35th in the list of metro areas with the highest rate of foreclosures for Q1 2009. One out of every 97 Atlanta homes was in foreclosure, a slight (~3%) decrease from the same time period in 2008. While this is great news, it doesn't change the fact that a large chunk of the current inventory in the Atlanta real estate market is made up of foreclosures, which are often referred to as REO (Real Estate Owned) properties. This means that Atlanta homebuyers are increasingly confronted with foreclosed properties in their house-hunting efforts. While there are some great deals to be had, they come with some serious caveats. Smart buyers should carefully consider whether buying a foreclosure is the right choice for them.
For a brief overview of the terms associated with foreclosed properties, please reference Atlanta Foreclosure Hot Words-Real Estate Words to Know.
Should I make an offer on a home approved for short sale? Or should I wait for the property to foreclose before pursuing it?
Making a lowball offer on a home in pre-foreclosure (when the owner has fallen behind in payments but the home has not yet gone to auction) is usually not advisable, unless the lender has approved the property for a short sale. A short sale means that the bank agrees to take less than what is still owed on a property, a concession they make just to get the property off their books, rather than going through the expense and hassle of a foreclosure auction and repossession of the property. Banks are not in the business of selling real estate and would rather avoid such a hassle, so sometimes it benefits them to approve a short sale on a home that is headed towards foreclosure.
It's not quite as simple as it seems, though. When a buyer submits an offer for a home approved for short sale (usually at a price that looks like a bargain, or is at least reasonable), the bank then has to approve the offer before actual sales proceedings can begin. This is the part known as the "Hurry Up and Wait" game, as banks are notorious for dragging their feet once such an offer has been submitted. While a normal house's closing typically takes a few months at most, getting a short sale approved almost always takes longer than this, and waits of six months or more are not uncommon. Offers are not always approved, so in many cases buyers wait around for weeks or months with no communication from the bank, only to abruptly learn that their offer has been rejected. Other times, the house enters the foreclosure process, mooting any offers that had previously been under consideration. This process is untenable for some buyers, excruciating for others, and frustrating for virtually everyone involved. But for buyers with lots of patience and flexible living arrangements, this strategy can really pay off once an offer is finally accepted.
Once a property enters foreclosure, it is auctioned off on the proverbial courthouse steps. These auctions are typically attended by representatives of the banks, builders and investors looking for deals, and lots of average homebuyers, many of them clueless. My first foreclosure auction was so disorienting and fruitless that it will probably be my last. There is an "insider" group who clearly knows what's going on since they are aware of the rules of the game and have gotten used to the process. The rest of the attendees (the "outsiders") look on confusedly as multiple auctioneers with clipboards read out property addresses one by one, and (quite surprisingly for me) not very loudly at all. You have to really know which auctioneer has the property you're interested in, and you must listen carefully for them to read out the address of said property. If you decide to bid, you must have more or less the exact amount available in cashier's checks (usually a series of smaller denominations that you can combine to total the final sales price). The starting bid is typically the amount owed on the mortgage. The lender holding the mortgage for the foreclosed property will send a representative to the auction to bid on it if no one else does (which is usually what happens), resulting in the bank repossessing the property and carrying it on its book as an asset. At this point, the bank is very motivated to dump the asset, so the response time for buyers putting offers on homes that have already foreclosed tends to be more reasonable.
For more information on short sales, please see Quick Clicks: Atlanta Short Sales.
Realistically speaking, how much of a discount will I be getting if I purchase a foreclosed property?
The notion that you will be getting a great property for pennies on the dollar is really a mistaken perception fueled by late-night infomercials and sensationalist news stories. When unloading a repossessed asset like a home, the lender wants to recoup its losses to the fullest extent it is able. So, the standard pricing for foreclosed properties is based on the amount that is owed to the bank on the defaulted mortgage. Depending on the down payment the previous owner made and how much principal s/he had paid off before defaulting on the loan, this amount could be anywhere from 5-40% less than the previous sales price. Generally speaking, banks will only take a loss up to a certain point, so there is a floor with regard to how much more they can discount a foreclosure. This magic number is different from bank to bank, but has typically been around 15%; that is, the least they will take for a foreclosure is 85% of the balance of the defaulted mortgage. For example, a house that originally sold for $400,000 with 10% down ($40,000) may foreclose and then be listed at or around $360,000 (if that is the remaining amount owed on the mortgage). The bank's ideal price floor would then be 85% of $360,000, or $306,000. This represents a price reduction of just under 25% off the previous purchase price. This sounds like a pretty hefty discount until you consider that in a property bubble like the one we experienced recently, home prices can easily become inflated, sometimes by as much as 25% or more. So while the banks have an ideal price floor, practical considerations often dictate that they lower the price even more in order to quickly unload the repossessed asset. It all depends on the bank you're dealing with and the property in question.
In some cases, when the bank takes possession of a property it considers especially desirable or thinks that there will be lots of demand for, the bank may try to get a little extra by pricing the property slightly above what is owed. Conversely, from time to time banks will set rock-bottom prices for certain properties in hot neighborhoods, in the hopes that the artificially low price will act as bait to lure buyers into a bidding war, thereby ultimately driving the price up. These tactics have increasingly fallen by the wayside, however, as the foreclosure crisis has reached new heights and banks find themselves overwhelmed with mortgage defaults and the resulting deluge of repossessed properties. The bottom line? Banks need to cut their losses by getting rid of these properties--fast. Buyers can net a significant discount if they are willing to purchase a foreclosed property, but not one that comes without strings attached.
Is there anything wrong with these homes?
To cut to the chase: most foreclosed properties are distressed in some way, some more so than others. This is least the case for new properties, in which the developer or builder lost financing, ran out of money, or couldn't sell existing units. These foreclosures can be great deals, assuming all construction has been completed and the property has structural integrity. In the event that they are not quite completed, taking care of unfinished details can prove costly and time-consuming. Also, buyers getting such a bargain cannot realistically expect that their new home will be worth as much as the original asking price, especially if they are part of a subdivision or complex in which most of the properties remain unsold. These places can feel like ghost towns, and little will change in the immediate future. The other danger with buying a property like this lies in the possibility that it has been stripped of valuable items, such as appliances or copper wiring, after sitting vacant for so long in a mostly-empty subdivision. Hence, savvy buyers should always look before they leap.
Properties that are resales and have been occupied by owners that went into foreclosure are a different story. While these homes are also vulnerable to being stripped of valuables, the more likely danger is that they are seriously distressed, either through neglect or as a result of deliberate destruction. Cash-strapped owners falling behind on their mortgage payments certainly don't have the means to keep up their homes, so it's not surprising that delayed maintenance often creates serious (and sometimes quite costly) issues with these homes. Other times, frustrated occupants deliberately damage the home out of anger at the bank for taking possession of their home. This type of damage is usually not too serious as it is primarily cosmetic in nature (e.g., holes in walls, paint poured on carpet, etc.), but you should still be aware of how much the fixes are going to cost you before making an offer.
Mortgage experts have pointed out that some foreclosures are so damaged that they don't qualify for traditional financing. There are some new programs that incentivize buyers looking to purchase and fix up foreclosed homes, but the properties must meet certain standards. If they are too damaged, they won't qualify, which effectively prevents most potential buyers from proceeding. Additionally, some homes are so damaged, the cost to correct all of the problems outweighs the potential benefit of a reduced selling price. This is also something to consider if you're thinking about buying a foreclosure.
The bottom line is that any offer you make on a foreclosed property needs to take all of that property's unresolved issues into consideration. Foreclosures are typically sold "As-Is", which means the bank does not claim to have any knowledge of the property's condition or any issues it might have, and therefore it will not complete any repairs or updates to satisfy the conditions of a sale. Be prepared for this by first having a home inspector check out the house and then getting estimates from a contractor for any repairs that need to be completed to make the home livable. Factor these costs into your total expenditure, and don't pay more for the property than you can afford, given the repairs you must also budget for.