Foreclosure myths and realities

Few real estate terms carry as much negative and emotional baggage as "foreclosure" - a word that inevitably signals some family's financial distress that has resulted in an eviction or abandonment of their home.

In many cases, homeowners with little or no equity in a house find themselves falling behind in their mortgage payments for a home now worth less than the money borrowed to purchase it. For some, the ruined credit and loss of a home that are part of the foreclosure experience are nonetheless preferable to the pressure to keep up those now impossible payments.

The depressed housing market has seen some parts of the country - such as Stockton, Calif., and Detroit - swamped with bank-owned homes for sale.

Here on Long Island, in both Nassau and Suffolk counties, there's been a gradual but nonetheless substantial increase in the number of foreclosed homes for sale. For a number of years until the middle of 2006, about 25 homes per week were foreclosed and added to the inventory as bank-owned homes for sale in each county. Those numbers have doubled in the past two years to about 50 per week per county, and, says Pat Ammirati, president of the Long Island Real Estate Report, the numbers have not leveled off.

But while the word "foreclosure" carries ominous connotations for most, it also is misunderstood by those who think a foreclosure represents a threat to home values in their neighborhood, or by those who think buying a foreclosure represents a bargain. Those who imagine that a foreclosure offers an opportunity for a fast purchase are likely to be surprised, as well.

Here is a look at some of the myths of foreclosure, according to Danielle Babb, co-author of "Finding Foreclosures" (Entrepreneur Press, $21.95):

MYTH
A bank-owned home is an opportunity to buy a home for pennies on the dollar.

REALITY
Although banks don't want to be landlords, they are under a great deal of scrutiny following the subprime loan debacle, a level of scrutiny that won't permit them to give away homes at bargain prices. Like any other business, a bank wants a good price for the sale of any asset.

MYTH
A foreclosed home for sale in my neighborhood represents a threat to home values in the area.

REALITY
If the bank is trying to get full value for the property, and assuming the area is not overwhelmed with foreclosed homes for sale, the property for sale is not much different from any other kind of sale.

MYTH
The bank is not going to take care of the property.

REALITY
The most common complaint is that grass isn't cut. But that can happen even when the home is occupied by an eccentric or reclusive neighbor. And while it's true that banks are not in a position to do a great deal in the way of maintenance or improvement, the home does represent an opportunity for an investor. If high grass is a problem, call town hall. If it continues to be a problem, take turns with neighbors cutting the front yard. In areas where high foreclosure rates have offered opportunities to squatters and vandals to steal copper piping, neighbors are encouraged to call the police. So far, these extremes have not been problems on Long Island, according to Adam Waldman of Re/Max Best in West Babylon, whose agency handles a number of bank-owned homes among its listings.

MYTH
A foreclosed home offers a quick sale because banks don't want to own homes.

REALITY
Although banks don't want to own homes, most banks were not prepared to have so much inventory on their books, and it's taking them a long time to act, even on offers for the full asking price. Some full-price offers can take three to six months to wend their way through a bank's bureaucracy in search of a decision.

MYTH
You can negotiate a deal with a bank just like any other home purchase.

REALITY
Bank-owned homes almost always carry the telltale phrase "sold as is." That's their way of saying, "Don't think you can negotiate your way to having the deck repaired or the roofing replaced before you go to closing." A private homeowner may be open to such negotiation, but not a bank. The most you can expect is a credit on the sale price that will allow the buyer to spend money repairing the property after the sale.

MYTH
Foreclosed homes offer a great opportunity for first-time buyers.

REALITY
Since foreclosure sales take much longer because of the banks' bureaucracies and backlogs of inventory, and since the prices are at best about 5 percent lower than the rest of the market, a figure more than offset by the work and improvements needed, a great many first-time buyers become quite frustrated trying to buy a foreclosed home.

Foreclosed homes are more attractive to investors and handymen who can afford to wait while the bank moves at its own speed. They are attractive to buyers who have no deadline to move in.

If foreclosed homes are not such a great bargain in this depressed market, what is a bargain? Experts like Babb say the best deals are in short sales - sales in which the homeowner is having trouble making payments but not yet in foreclosure. In a short sale, both the bank and the homeowner have agreed to take a negotiated lower price for the sale of the home to avoid foreclosure.

Short sales require that the bank be willing to accept less than the amount called for in the mortgage, so this means the bank is a third party to negotiations that in other sales involve only the buyer and seller.