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Foreclosures Can Open The Door To Homeownership

The opportunity to buy a bargain-priced foreclosure hasn’t completely passed, though, because some foreclosures are still coming on the market in the Washington area, particularly in Prince George’s County.

When Anne Guglik, a fire investigator and 10-year member of the National Guard, wanted a larger condominium in her Greenbelt neighborhood, she didn’t specifically look for a foreclosure. But when she found a three-
bedroom condo foreclosure listed at $128,400, she jumped at the opportunity.
“I paid $109,000 in 2004 for my one-bedroom condo, so this is definitely a great price,” Guglik says. “Fannie Mae owned the condo and sold it as is, so I’m going to have to do some work to get it into the condition I want, but it’s still a good value.”

Guglik expects to spend about $3,000 or more to fix some plumbing and electrical problems, replace some carpet and paint her new home. She plans to do a lot of the work herself to save money.
“In the long run, I think this will pay off, but I think anyone looking at a foreclosure should set aside money for repairs and think about that cost when making an offer,” she says. “If you like doing work yourself or just want the home finished the way you want it, a foreclosure can be a great option.”

Will Stein, broker/owner of Belair Realty in Bowie, works with investors who are looking to buy and flip foreclosures and buyers who are looking for a home to purchase as their primary residence.
“Prince George’s County’s housing market has been recovering well in recent years, but it has a higher number of foreclosures than other parts of the D.C. region,” Stein says. “Banks have been holding onto their inventory of foreclosures, so we’re expecting an increase in the availability of these properties over the next 18 months. This is a great opportunity for buyers and investors.”

According to the RealtyTrac U.S. Foreclosure Market Report for September, the latest month for which data is available, Maryland has the second-highest foreclosure rate in the nation, with one in every 204 housing units in the state having a foreclosure filing. Only Florida has a higher rate of foreclosures.

Maryland foreclosure activity in the third quarter increased on a year-over-year basis for the ninth consecutive quarter, according to RealtyTrac, and lenders repossessed 19 percent more homes during the third quarter of 2014 than in the same quarter a year earlier.

“In Virginia, foreclosures were processed and sold more quickly, but in Maryland, homeowners have had lots more time to remedy their situation if they’re having trouble paying their mortgage, which is why we’re seeing more foreclosures here now,” says John Lesniewski, an agent with Re/Max United Real Estate in Upper Marlboro.

Home prices in Prince George’s have been climbing and inventory continues to be tight, so for first-time buyers, a foreclosure may be the most-affordable option.

According to the latest Long & Foster Market Minute report, the median sales price in the county rose 14 percent from $206,000 in October 2013 to $235,000 in October 2014. Median sales prices were also up 4 percent in October 2014, compared with the previous month. The number of homes listed for sale declined by 30 percent year-over-year.

“Foreclosures represent a segment of the market that appeals to investors, first-time buyers and repeat buyers,” says Michael Vaughn, an agent with Long & Foster Real Estate in Mitchellville. “The biggest challenge for buyers is the condition, because many of them have not been well-maintained.”
While market conditions change daily, Vaughn says foreclosures represented about 13 percent of the market in Prince George’s in mid-October.

Vaughn says there are good deals available for buyers willing to put in the time and energy to find contractors who can fix the property. He says that some buyers simply eliminate foreclosures that are in disrepair but that they could be missing out on a bargain.

“A home in serious disrepair or one that has mold will take longer to sell, so the bank will discount the price a lot more if it sits on the market,” he says. “The worse the condition, the better the discount, but some buyers don’t realize that homes can be fixed for less money than they think.”
Stein says that not all foreclosures are in terrible shape. In fact, he says, this is the biggest misconception about foreclosures.

“If a home has been vacant for a while, that can have an impact on maintenance, but I tell buyers to turn on their optimism because there’s lots of potential in an ugly home,” he says. “The worse a house smells, the happier I am for my buyers because the price will be lower and with a little sweat equity the place can be better than ever.”

Pros And Cons…

The biggest advantage of buying a foreclosure may not necessarily be that it is a bargain, Stein says, but that buyers can find a larger home or fix up a home the way they want while keeping well within their budget.

Lesniewski says that the main reason to buy a foreclosure is to get a below-market price and to fix up the house the way you want.

“If you’re looking in an area where homes are priced at $200,000 and you’re able to buy one for $120,000 and finance $40,000 in repairs into the loan, then you end up with a $160,000 home that’s in better condition than the $200,000 home you might have bought,” he says.

Vaughn says most buyers think they don’t want a foreclosure but will look at one that meets their criteria for location and size. He says once buyers understand that they have the option of using a renovation loan to wrap their purchase and repair costs into one loan, they’re more enthusiastic about a foreclosure.

“An advantage of a foreclosure is that it can be more straightforward than a traditional transaction,” Stein says. “Banks are just looking for the right price so you won’t have to negotiate a seller rent-back or accept a contract contingent on the seller finding a place to buy. Foreclosures are typically immediately available once you go to settlement.”

But buyers should expect to have to do more repairs or modifications to a foreclosure because the property won’t usually have been improved for sale the way traditional sellers prepare their property.
“With a foreclosure, you give up the option of buying a home in stellar condition for the opportunity of a lower price,” Stein says.

Lesniewski says that foreclosure buyers sometimes get into trouble if they get excited by the element of competition and overpay for a property or underestimate the cost of repairs.

Foreclosures are sold as is, which means that buyers cannot request repairs or improvements to be made by the sellers. But buyers can have an inspection of the property before finalizing their purchase.
Home Inspections and Investors…

Real estate agents recommend that foreclosure buyers hire a home inspector to evaluate the condition of the property and find major potential problems. However, sometimes utilities are not turned on in vacant properties so it can be harder to test the heating and air conditioning systems, says Lesniewski, who recommends working with an inspector and real estate agent familiar with foreclosure issues.

While some inspections are an “information only” inspection, it’s also possible to terminate your offer based on the findings of a home inspection, Vaughn says.

“You should always have the option written into your contract for a return of your deposit if your inspection reveals property conditions that are unacceptable to you,” he says.

Buyers should anticipate competition from investors for foreclosures, particularly if the price is low.
“Investors often pay cash [and] it can be tough to compete against that, so some banks offer a 14- or 21-day opportunity for owner-occupants to make offers before they open up the sale to investors,” Lesniewski says.

Lesniewski says owner-occupants are often more willing to bid above the asking price to get a good home, while investors need to pay as little as possible to increase their profit.

Vaughn suggests that buyers who anticipate competition offer $5,000 to $10,000 above the list price and offer better terms such as a shorter inspection time, a shorter financing contingency or agreeing to use the selling bank’s settlement company.

“Another offer came in from an investor for my condo on the same day I bought it,” Guglik says, “but I think it helped that I made a full-price offer, had an approval for a VA loan and, most important, that I planned to live in the property.”

A strong loan preapproval is essential to winning a multiple-bid offer for a foreclosure.

Financing A Foreclosure…

While Guglik set aside savings to renovate her new home, most foreclosure buyers opt for a renovation loan, says Michael Chelst, branch manager with Norcom Mortgage in College Park.

“Most buyers choose an FHA 203(k) loan because they can buy the property with a down payment of just 3.5 percent and finance almost any renovation,” Chelst says. “It’s not just for major repairs like replacing the roof; you can finance new floors or new kitchen cabinets or nearly anything other than luxury items like a swimming pool.”

If your repairs will cost more than $35,000, you’ll need to work with a HUD-approved consultant, Chelst says.

“The loan is based on an as-is appraisal plus the cost of repairs based on contractor estimates,” he says. “We have a list of contractors that we’ve worked with, and most real estate agents have recommendations, too, so even first-time buyers can feel comfortable buying a home this way.”

Chelst says the Fannie Mae HomeStyle Renovation loan is similar to the 203(k) loan but requires a minimum down payment of 5 percent. “The Fannie Mae loan is a little more rigid in terms of requirements, so borrowers have to have a higher credit score and their income needs to be a little higher, so you have to be a solid buyer to qualify,” he says.

Both of these loan programs can be used with down-payment assistance programs. Chelst says programs are available in Prince George’s with up to $60,000 in home-buyer aid. He says Federal Housing Administration loans allow 6 percent of the home price in closing-cost assistance, while conventional loans allow up to 3 percent.

“Typically, banks pay 3 percent of the closing costs for foreclosure purchasers, which is a benefit to buyers,” Chelst says.

Chelst recommends that foreclosure buyers be ready with the names of contractors they want to work with as well as a preapproval letter for a mortgage before they start to look at a property. He recommends working with a lender who offers renovation loans because not all do.

“You don’t want to restart the entire loan process if you end up deciding you want a renovation loan,” he says.

Chelst says buyers need to work with an agent who understands the foreclosure process and will help them understand the fine print in the contract. Sometimes banks attach addendums to the contract after a verbal agreement has been made, so it’s important to read everything before signing the contract.

“Buyers need to be careful to analyze the worst-case scenario of any foreclosure in terms of problems with the condition,” Lesniewski says. “They need to make sure they are working with a good team of professionals such as a Realtor, a home inspector, a lender and contractors who can help them make a smart buy.”

Tips For Buying A Foreclosure…

A foreclosure can be an affordable option for home buyers — but it can be risky. Here’s what you need to know to avoid potential pitfalls and make the purchase a positive experience:

• Get pre-approved for financing. Attractive foreclosures in good locations are a magnet for investors, who are often able to pay cash for the purchase. To compete, you need to be fully ready to finance your purchase with a pre-approval for a loan.

• Check out home buyer assistance programs. You may qualify for down payment or closing cost assistance through your state or county government. Many banks pay up to 3 percent of closing costs when you buy a foreclosure, so be sure to ask about the availability of that assistance when you identify a home to buy.

• Save some cash. A strong earnest money deposit and larger down payment can help you if you’re competing with other buyers. If you make a slightly higher offer you’re in a better position over other buyers.

• Know your market and your priorities. Be wary of getting caught up in a bidding war or in the excitement of finding a bargain. This will be your home, so make sure the location is what you want and the structure and floor plan meet your needs. While you can make cosmetic improvements to a home, you can’t always change the layout or expand the living space.

• Be ready to buy the home “as is.” Bank-owned properties are typically sold as is, meaning that buyers cannot request repairs to be made as part of their offer. Not all foreclosures are in terrible shape; in fact, some may have had improvements made so that the house can be sold.

• Have a home inspection anyway. Buyers should still have a home inspection so that they understand the condition of the home and can decide to withdraw their offer and have their deposit returned if the condition is unacceptable.

• Be prepared with trustworthy contractors. If you lack the skills or time to make improvements yourself, it’s a good idea to identify contractors before you make an offer on a foreclosure so you can get their input into the cost of making it livable.

• Consider renovation financing. The FHA 203(k) loan program and the Fannie Mae HomeStyle Renovation loan allow borrowers to finance their home purchase and renovation costs into one mortgage. Consult a lender experienced with these loan programs if you think you may buy a foreclosure.