Oct. 22, 2006
Copyright © Las Vegas Review-Journal

By JENNIFER ROBISON
REVIEW-JOURNAL

So how much of a bargain is a home in foreclosure?

“Under the best circumstances, you’re buying the home wholesale, and typically, we consider wholesale 20 percent or more under market value,” said John Izzo, a Realtor with Coldwell Banker Premier Realty.

ut the ideal circumstances can be tough to come by. Stiff competition for properties in default, bureaucratic rigmarole and sorely needed renovations can all stand in the way of a picture-perfect foreclosure purchase.

“(Buying foreclosures) is not for the beginner investor or the first-time home buyer,” Izzo said. “It’s for seasoned investors who have cash and good (financial) backing.”

If you’re determined to wade into the foreclosure market despite the uncertainties, keep these pointers in mind:

•Expect lots of company

Publicity about the good deals that abound among foreclosures drew thousands of investors and brokers to the submarket in the last decade, said Robert Klausmeier, a sales agent with Realty Executives in Las Vegas and owner of Mastermind Investments. A cottage industry focused on default sales has resulted, and foreclosures have become one of the more competitive arenas in real estate. You might call on a distress sale with bargaining in mind only to find half a dozen prospective buyers have beaten you to the punch. A bank auction could have 30 or more investors bidding on the same property.

“To find a deal that will actually work out is tougher to do today,” Klausmeier said.

•Don’t count on major incentives

Local buyers in today’s housing market are accustomed to juicy seller incentives, including help with closing costs and even assistance with mortgage or homeowners association payments in the first few months of occupancy. But homeowners in default often don’t have the equity to negotiate on purchasing expenses, Klausmeier said, so you can’t expect aid in a foreclosure deal.

•Understand lenders’ time lines

Banks will take longer than a typical seller to answer your offer, said Bob Hamrick, broker-owner of Coldwell Banker Premier Realty in Las Vegas. Although a homeowner will accept or decline a deal within hours, lenders might not get back to you for several days. Mortgage holders also retain the right to field additional offers while they’re mulling your proposal.

If you’re pursuing a home that inhabits that gray area between mere late payments and actual foreclosure, you’ll be negotiating with two parties: The homeowner and the lender. Consider the lender the true seller, because that’s who has the power to reduce the payoff on the loan, Hamrick said. A buyer might set a price with the homeowner, but if the homeowner can’t convince the bank to agree on the lower price, the deal could be off.

“The buyer thinks he’s bought a home, when in reality the lender has refused to reduce the payoff by that amount,” Hamrick said. “That’s where the process can get a little sticky and take a lot of time. Having patience is one of the rules of thumb for buyers wanting to purchase in any of the stages of the foreclosure process.”

•Plan on potentially big repairs

Foreclosure purchases usually come “as is,” which means the buyer has to cover rehab work if needed. And a property in foreclosure will probably require some TLC, experts say.

Homeowners who couldn’t keep up with their mortgage payments likely didn’t have the money for basic maintenance either, Klausmeier said. Through his Mastermind Investments firm, Klausmeier recently bought a $125,000 townhouse that needed $9,000 in repairs. He’s seen other foreclosures require as much as $40,000 in repairs.

And that’s before you consider intentional damage from the owners.

Izzo said homeowners in default are often distraught over the loss of their home, and they sometimes take their rage out on the property to punish the new occupants.

He said angry, departing homeowners have poured concrete in toilets, splattered interiors with paint and ripped utility wiring out of the walls.

“You become their enemy,” Izzo said.

•Look out for liens

The odds are high that the defaulting homeowner has other unmet obligations, Izzo said, so research the home’s title for any outstanding liens. Possible claims against the home could come from the federal government for unpaid income taxes, from the homeowners association for delinquent monthly dues or from contractors who were never compensated for home improvements.

Any liens that are intact when you close on a foreclosure purchase will stay with the house. That will make your home ineligible for the title insurance that protects you against challenges to your property ownership.

•Deal with longtime homeowners

Steer clear of foreclosing owners who have purchased with small down payments in the last 18 months. They could be upside down on their loan or have little home equity, which leaves them with virtually no room to negotiate the sale price downward, Hamrick said.

Stick instead with sellers who have owned for two years or more. As actual foreclosure looms, such homeowners would be able to cut into their equity to get a deal done and spare their credit rating.

•Bypass foreclosures and head for the open market

When Klausmeier gets phone calls from consumers interested in snapping up foreclosures, he said he often tries to “scare them out of it.”

“While it can be profitable, it’s not as simple as buying low and selling high,” he said. “I’ve bought houses for $100,000 under what they’re worth, and barely made it out with a profit because of all the unforeseen circumstances when you buy and close quickly.”

He suggested starting mainstream by checking out the Multiple Listing Service, the Greater Las Vegas Association of Realtors’ database of all properties for sale. The service has more than 20,000 homes listed — a bumper crop of inventory that could indicate an abundance of desperate sellers.

“Buyers hold all the cards right now,” Klausmeier said. “You could get a great deal finding someone who has had their house sitting vacant for six months, paying that mortgage along with a loan on another home they’ve already moved into. They’re throwing their hands up in the air and saying, ‘Come take this (house) from me.’”