Home buyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.
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“Seth and Crystal Grotzke, both 25 years old, recently bought a bank-owned two-bedroom, two-bathroom townhouse in Edina, Minn., for $110,000—when similar homes in the same development were selling for as much as $131,000. But exactly one day before the scheduled July closing, the Grotzkes learned there was a second, unpaid mortgage. Because of the foul-up, the couple was forced to live in Mr. Grotzke’s boss’s basement for more than a month. They finally closed on Aug. 31.
“We knew there would be title issues, but none that would last for that long,” says Mr. Grotzke, an assistant pastor. He adds that buying a foreclosed property is a way for God to “teach you patience.”
“Colin and Alisabeth Shearn of Cherry Hills Village, Colo., a Denver suburb, managed to snag a seven-bedroom Mediterranean-style house in a short sale for $1,272,000, more than $900,000 below its original listing price in 2007. By the time they bid on the house last February, it had gone unsold for nearly two years and the price had been reduced to $1.5 million from $2.2 million. The couple closed on the purchase at the end of May, and moved in with their two preschool-age children.”
The U.S. Treasury Department is expected to issue streamlined guidelines to lenders on short sales soon. Housing-industry leaders say complicated procedures are hindering them from clearing the large inventory of distressed property necessary to return the housing market to normal. Now, only about 20% or so of short sales are successful, according to real-estate brokerage Re/Max International Inc.
Buying a foreclosure is usually speedier than a short sale because lenders already possess the property. But there are other drawbacks. State laws vary considerably with respect to legal procedures surrounding foreclosures. Many states require judicial proceedings for foreclosing on a home that can take more than 12 months, a period during which the home may be vacant or occupied by tenants or squatters. Homes may have appliances, pipes and even electrical wiring ripped out.
Buyers of bank-owned properties are usually stuck with whatever hidden problems they discover, including construction defects, and they seldom get additional price concessions. For these reasons, it’s especially important for distressed-property buyers to have a thorough inspection by a qualified home inspector or inspection engineer, as well as a thorough title search and title insurance.
Despite the hurdles, competition for low-priced foreclosures under $300,000 is keen, sources say. “The bargain hunters have come out from everywhere, and they are getting into bidding wars,” says Re/Max Chairman Dave Liniger.
Buyers must be prepared and ready to move on a dime. If they’re paying cash, they have to certify they have the funds available. Those who need financing should obtain pre-approval from a lender before even looking at properties.
Successful foreclosure buyers often bid significantly above the asking price. Chuck Brueske, 46, a hospital biomedical technician, says he paid $111,000 in August to win a bank-owned townhouse built in 1981 in Maple Grove, Minn., listed at $99,600.
Mr. Brueske says his own good credit history helped him win over two other bidders.
“It was unusual that in a down, depressed market that I had to bid more than the asking price, but as it turned out the other bids were higher than mine,” he says. “It took me a while to swallow that.”
Some home buyers give up after discovering there are bargain properties without all the obstacles. Jerrold Horning, 34, an electronics technician for the U.S. government in El Cajon, Calif., says he and his wife bought a house in the conventional market after seeing the condition many houses were in.
“Some of the foreclosures I looked at were horribly trashed. You would have to put another $100,000 in just to make it livable,” he says. Of buying a distressed property for a primary home, he says, “I don’t think it’s worth the hassles.”
—Ruth Simon contributed to this article.
