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Foreclosure Properties – The New Trojan Horse

18 October, 2010 (19:30) | Uncategorized | By: Carol

October 15, 2010 By RON LIEBER Are you out of your mind to even consider buying a foreclosed property right now? Todd Phelps and Paul Whitehead didn’t think they were last month when they were the winning bidders in a foreclosure auction on the steps of the main Riverside, Calif., county courthouse. They thought they had won the lottery. For years, they had been living in a rent-controlled apartment in Santa Monica and waiting out the housing bubble in hopes of buying a weekend getaway in the Palm Springs area. And on Sept. 10, they thought they had finally done it, getting a house for $137,000. Several days later, however, they realized that what they had really bought was a second mortgage from Wachovia on a house that still had an enormous, unpaid primary loan. In other words, they did not own the home free and clear, and the auction company wouldn’t give back their $137,000 check. The tale is certainly enough to give anyone pause, especially as several banks slow or halt their foreclosure proceedings amid questions about how they cut corners to speed up the process. Still, roughly half the recent home sales in hard-hit states like California, Arizona and Nevada have been foreclosures or short sales, according to RealtyTrac. Anyone wanting to buy homes in those and other states hit hard by the housing crisis will probably encounter these sorts of properties. And the houses will be tempting for scores of first-time homebuyers, second-home seekers and people looking to get an early jump on buying a retirement home while prices and interest rates are low. So given the pitfalls, are they crazy? The answer is no, not always. But it’s important to keep something in mind. “The whole foreclosure process is adversarial, even though it’s nonjudicial in many areas,” said Tom Cahraman, the presiding judge in Riverside County. “One person is losing their home, and another person is trying to get a new home at a discount price.” He’s absolutely right. Strap on the body armor, and think hard about the following five factors if you find foreclosed homes even remotely enticing. THE LOAN First of all, many banks that own foreclosed properties would prefer that you stay far away from their listings. In fact, they may sell a property for less money to an investor who can pay all cash. You, on the other hand, will probably need a mortgage, and your need for bank approval can delay the sales process because your lender may hesitate when you say you’re interested in a foreclosed property. “Lenders will usually only give you a loan on homes that are pretty ready to be lived in,” said Andy Tolbert of Oneir HD Realty in Longwood, Fla., who represents buyers shopping for foreclosed and other homes and invests in distressed property herself. “If the carpet is ripped out and the toilets are missing, they are not going to give the loan.” This is especially important to consider if you’re using a Federal Housing Administration or Veterans Administration loan, where there may be particularly stringent requirements. “I have seen V.A. lenders require torn carpet to be repaired or replaced because they see it as a hazard to the new occupants,” said Mike Goblet, a mortgage broker with United Mortgage Financial Group in Mesa, Ariz. There are some exceptions. The F.H.A. offers a mortgage called a 203(k) that may allow you to borrow money to buy and substantially rehabilitate a foreclosed property. But it could take a while to find a bank that offers the loan and to get your project approved. Some sellers, meanwhile, won’t let you buy with F.H.A. loans. THE AUCTION PROCESS Foreclosure auctions can be a dangerous place for people who don’t know what they’re doing or are relying on help from people who are sloppy or negligent. Mr. Phelps and Mr. Whitehead had a real estate broker who was supposed to be checking the records of the home they wanted to buy at auction. But the broker did not discover, or did not report to them, the fact that the property had several claims against it. They considered suing the broker, but first turned to the auction company, Executive Trustee Services, a unit of GMAC Mortgage (one of the companies that suspended many foreclosures in recent weeks). At the company’s Burbank, Calif., office, a representative told Mr. Phelps that all sales were final and that Executive Trustee was merely a middleman. Mr. Phelps asked for further documentation and was told that he could have it when he returned with a subpoena. Classy, no? Gina Proia, a spokeswoman for the company, did not respond to requests for comment. The couple also wrote plaintive letters to executives at Wachovia, now part of Wells Fargo, because both defaulted loans attached to the home they were trying to buy came from that bank. (The auction company was working on the bank’s behalf.) After a couple of rounds of e-mail and phone inquiries on my part, the bank decided to give Mr. Phelps and Mr. Whitehead their money back. “Given the circumstances, we have decided to rescind the sale on the property and return the funds to the buyers,” Vickee J. Adams, a Wells Fargo spokeswoman, wrote in an e-mail on Friday. Meanwhile, the couple, having nearly lost most of their life savings, now realize that they were in way over their heads bidding for homes at auction and were lucky to get their money back. “Trust no one,” Mr. Phelps said. “We didn’t get involved when the market was going crazy and everyone was getting subprime mortgages, and we felt like we were smart and that this was our reward for sitting on the sidelines. But there are enough bargains to be had on a straight sale.” THE INSPECTION Let’s say you do manage to get a loan, resist the auctions and take the straight sale approach, shopping through a real estate agent. You’ll want to make any bid for a home contingent on a thorough inspection from someone familiar with foreclosed properties. Mold may be your first concern, especially in more humid climates, given that many foreclosed homes have been uninhabited for months. Then there’s sabotage. You should arrange (or have the real estate agent arrange) to have the power and water turned back on before the inspection if possible. Why? The previous owner (or vandals who have been in the home since) may have cut wires behind walls or poked holes in pipes in various places. Having running water and power can make these things easier to detect. The pour-concrete-down-the-toilet trick is one that most good inspectors know to look for. But Jon Bolton of The Inspectagator in Oviedo, Fla., recently ran into a bit of destructive ingenuity he’d never encountered. “Someone went on the roof with a bag of cement and dropped it down the chimney,” he recalled. “It rained, and now you have a solid block of concrete somewhere where it’s extremely difficult to get in to break it up. That’s just wrong.” Also, don’t forget to inspect the minutes of the condominium board or homeowners’ association, if there is one. It may be in deep financial trouble if other foreclosures have occurred. Ms. Tolbert says that a good title insurer may be able to help with contacts if you have no luck finding the manager or treasurer on your own. THE TITLE INSURANCE Speaking of which, title insurance is a must, particularly now. In the unlikely event that a former owner somehow wins back rights to the foreclosed home you end up buying and then tries to kick you out, you will need to make a title insurance claim. And if you plan to put a lot of money into fixing up the home, you’ll want to ask about a rider on the insurance policy that can cover you for more than what you paid to buy the property. THE WAITING GAME Still worried about the prospect of former owners showing up someday and asking for their home back? Cyd Weeks, a real estate agent with in Palm Coast, Fla., suggests waiting a few months before trying to buy a foreclosed home. Now that all eyes are on the foreclosure process, he said, homes coming on the market early next year will probably have been foreclosed upon with much more care and precision. Indeed, Ms. Weeks’s tip suggests a larger point. Given the foreclosure moratorium that some banks have put in place and the lengthy investigations and lawsuits that are sure to follow, there is no rush to buy as long as you don’t have to move or if renting is an option. Take your time. Assemble a panel of experts and apprentice yourself to them. And watch the listings carefully. For better or for worse, foreclosed properties are going to be available for a very, very long time