Virginian-Pilot Article: Foreclosed properties: A bargain – or not?
Charlie was recently interviewed for an article in the Virginian-Pilot that was written by Lia Russell and printed on June 15, 2013.
The original article is here. Or you can read it below.
IN 2011, VIRGINIA Beach residents John and Jenah Porter were toying with the idea of buying a home.
They knew they liked Courthouse Forest, near their rented house, and periodically would drive through the neighborhood checking out listings that came on the market.
That spring, during a routine drive, a brick ranch caught their eye. When they went home and pulled up the listing online, they realized it was a foreclosed property – one that has been either sold to a third-party bidder or taken over by a lender (bank) or other lien holder at an auction when the owner has failed to make payments on the property and other efforts of collection have been unsuccessful.
Following the 2008 housing market crash, foreclosures and short sales, which are resales of properties in which the owner owes more for the house than its appraised value, made up nearly half of all real estate transactions in Hampton Roads at one point, according to Justin Caplan, executive vice president of Atlantic Bay Mortgage Group.
“That number has gone down more recently, but they still make up between 20 to 30 percent of our closings,” Caplan said.
Foreclosures can offer tempting prices to buyers and, more commonly, to investors who snap up cheap properties and “flip” them, or fix them up for quick resale at a profit.
Foreclosed properties come with a host of unique concerns, such as longer closing times, intentionally inflicted damages that may include complete stripping of interior features, multiple and hidden liens, and title problems.
The Porters did their homework on the foreclosed property they found, going so far as to track down the previous owners and learn of a plumbing problem that a routine home inspection would likely not have detected.
“We learned that there was a leak in the pipes underneath the kitchen floor, and the previous owners told us that they had a $9,000 estimate to fix that problem,” John Porter said.
The house that interested them was a three-bedroom, two-bath, 1,900-square-foot brick ranch built in 1972. It had all the features they wanted for their growing family, but when they toured the house, they came across a few surprises.
“One room had no carpet or flooring. It was a painted concrete floor with sand embedded in the paint. It felt like sandpaper,” John Porter said. “The wall was painted in a camouflage patterned. It was dark and scary.”
Other rooms were painted black or orange with graffiti scrawled across them. Each room had different vinyl stick-on tiles that varied throughout the house.
Despite the home’s interior appearance, the couple was not dissuaded.
“They were cosmetic problems, and we knew we could fix them without a lot of expense,” Porter said.
The property the Porters found had been repossessed by a bank, the preferable way to purchase a foreclosure, Caplan said. The other way is via public auction, where the buyer assumes greater risk because the property may not have clear title with multiple undisclosed liens.
Other industry experts feel that real-estate-owned, or REO, property – foreclosed property repossessed by a financial institution – is only marginally safer to purchase than bidding on homes at public auction.
Banks’ policies differ about how to handle title defects, and some just use their in-house title companies or affiliated agencies to “insure over” title problems and not to fix them, warned real estate attorney Charlie Pittman of Real Estate Legal Services in Virginia Beach.
The Porters purchased their home without any glitches and ended up with $70,000 in immediate equity.
That’s a happy ending that doesn’t always occur for those who try to purchase foreclosures. It’s because the Porters did their homework – and they had the assistance of a licensed real estate agent.
Real estate broker Mimi Stephan-Kopassis of Virginia Beach-based MK Realty Group, who helped the Porters, said she has heard of people bidding on foreclosed properties at auction, thinking they were purchasing a home when all they did was pay off a tax lien for $20,000 dollars.
“They owned nothing,” she said. “They simply were out $20,000, and they had no recourse.”
“The hardest part for most people in buying foreclosure auction property is bidding on a ‘pig in a poke,’ ” Pittman said. “You don’t usually get to look at these houses on the inside.”
He also warned of potential undisclosed liabilities.
“The normal wisdom is that foreclosure auction wipes out foreclosure liens, but it does not wipe out super-priority liens such as some tax liens, IRS liens, mechanics’ liens and homeowner association liens,” he said.
Such liens must be researched immediately prior to auction, he said, as they can be attached up until the moment “the gavel drops.”
While Pittman agreed that auctions can be daunting, he said that even when buying REO property, a buyer needs his own closing attorney and title policy and should not accept the bank’s offer of a free closing or a free title policy, he said.
“You get what you pay for,” he cautioned.
Pittman, Caplan and Stephan-Kopassis offered the following advice to buyers who are considering purchase of a foreclosed property:
Tread carefully at foreclosure auctions.
If it seems too good to be true, it probably is.
If an auction is requiring $5,000 for a property valued at $160,000, beware. You may only be bidding on a secondary lien, Caplan said. You also usually must pay in cash within a short period of time – and possibly without seeing the property.
As a rule of thumb, Pittman advises not paying much more than 50 percent of the estimated home’s value at auction unless you have the opportunity to inspect the property in advance and are 100 percent certain of your financing.
“If you don’t have the cash to perform the purchase within 30 days, or if you are counting on the bank to finance part of the purchase price and the bank appraises the property for less than you bid, you could lose your deposit,” he said.
Auctions are risky, Stephan-Kopassis said.
“I’ve been in the real estate business for 32 years, and I wouldn’t even do it,” she said.
But even foreclosures repossessed and sold by financial institutions carry risk, Pittman cautioned, including contracts that heavily favor the seller.
Try to level the playing field by getting your own experienced agent or real estate attorney to help protect you in the contract stage on an REO purchase, he said.
Purchasing a foreclosed property can take longer that a normal real estate transaction, Caplan said.
“There may be a host of behind-the-scenes problems that the buyer may not know about that take longer to resolve. Sometimes, as mortgage brokers, we aren’t even told what they are,” he said.
It used to take six to 12 months to close a loan on a foreclosure, said Stephan-Kopassis, but financial institutions have become more adept at processing such loans and, on average, the time to close has been reduced to 30 to 90 days. The ramifications of an extended closing period can affect the loan rate and the time period in which a buyer may take possession of a property.
“Just know that it can take awhile,” Caplan said. “Patience is very important.”
Use an experienced real estate agent or attorney.
You may think you know a lot about buying property, but an experienced real estate agent or attorney can help you navigate the obstacles in purchasing a foreclosed property.
“Most Realtors have rolled up their sleeves and realized the benefits of gaining knowledge on these time-consuming transactions,” Stephan-Kopassis said. “The end result is better service to the client. Real estate agents can help prepare investors and clients on how to minimize their risk.”
Pittman and Caplan also strongly recommend having your own representative in the process and not using the bank’s listing agent.
“They help protect the buyer’s interest and make sure the closing process keeps moving along,” Caplan said.
Learn as much as you can about the property.
The Porters learned about their property by talking to neighbors, tracking down the previous owners, touring the house and ordering a home inspection.
“Foreclosed properties are seriously distressed properties,” Caplan said. “They usually have more structural, cosmetic and financial problems associated with them, and buyers need to know what they are getting into.”
A real estate agent also can help with this issue by providing additional information about a property that a buyer may not have access to, Stephan-Kopassis said.
In some cases, banks can require you to complete a property inspection before you enter into a final contract, Pittman said.
In such instances, an experienced agent or attorney can help negotiate better terms for the buyer, he said.
Do a title search, and purchase title insurance.
With possible hidden liens and other issues that can forestall a clear title to the property, it’s always advisable to order a title search. If you’re mortgaging the property, a bank or other financial institution will insist on a title search and title insurance to protect its investment. But even if you’re purchasing with cash and not required to do one, Caplan advises paying for a title search and purchasing title insurance to protect your investment.
Again, Pittman cautioned against relying on the bank’s title work, as they tend to overlook what they consider “minor” title defects that may cause a buyer big headaches in the future.
Pittman also warned of an increasingly common phenomenon among bank-owned properties called “zombie” titling.
A zombie title occurs when the bank takes possession of a foreclosed property, but doesn’t retitle the property to itself prior to reselling it, leaving the title in the foreclosed homeowner’s name.
Meanwhile, judgments can continue to accumulate against the previous owner and the new buyer could incur the liability, making it difficult, for example, to get into good standing with utility companies or homeowner associations until the former owner’s bills are paid.
Written by: Lia Russell, firstname.lastname@example.org
Mimi Stephan-Kopassis, principle broker, MK Realty Group, 757-434-0336, www.mkrealtygroup.com
Justin Caplan, executive vice president, Atlantic Bay Mortgage Group, 2540 Virginia Beach Blvd., Virginia Beach, 757-222-9838, www.atlanticbay.com
Charlie Pittman, real estate attorney, Real Estate Legal Services, 712 Hillingdon Court, Virginia Beach, 757-467-7600, www.realestatelegalservices.com