One Sunday morning this past winter, Brett Sefchek was scrolling through real estate websites when he stumbled on an ad for a bank-owned property in Long Beach.
The 30-year-old and his girlfriend weren't even in the market to buy a place — Sefchek was looking for a rental — but the price for the 1,300-square-foot, two-bedroom co-op seemed too good to pass up. He contacted the broker, submitted an offer, secured a mortgage and met with the co-op board. He closed three months later, purchasing the foreclosure for $236,000, nearly $100,000 less than similar properties in the area.
"I wasn't sure what it was going to be like going into it," says Sefchek, a sanitation inspector who spent the next few weeks making cosmetic fixes — some drywall, Spackle and paint.
His experience was relatively painless, but the process of buying an REO or real estate owned property — a house owned by the lender, such as a bank — is usually much different from a typical sale. It's a process many say is going to become much more common, especially in New York State, as a "shadow inventory" of foreclosed properties comes to the market.
The foreclosure process is typically lengthy in New York, but it ground to a halt last year because of extra scrutiny on lenders after the "robo-signing" scandal, where some bank employees were found to have signed documents when they didn't know anything about the cases or used fake signatures to speed up the process. Now, the foreclosure process seems to be picking up.
There were 5.5 percent more foreclosure filings in Nassau County and 3.2 percent more in Suffolk in the second quarter of 2012, compared with April through June of 2011, according to the most recent report from RealtyTrac, a website that provides foreclosure data.
1. FIND A FORECLOSURE
The first challenge in the buying process is finding a foreclosed property.
Many bank-owned properties are not yet listed for sale, says Daren Blomquist, a vice president with Irvine, Calif.-based RealtyTrac.
"It's kind of this strange juxtaposition," Blomquist says. "Nationwide, we see more than 6,000 bank-owned properties. However, in looking in different areas, our estimates are [that] only 20 percent of 6,000 properties are actually listed for sale.”
It can take time for a bank to list a property once it’s repossessed, he explains. Lenders often must evict the homeowners, do repairs, get a price opinion and then hire a broker to market the property.
Buyers interested in foreclosed properties can search RealtyTrac – after a free, seven-day trial, subscription rates range from $50 per month to $250 for a full year – which notes whether a property is for sale or not. If it’s not yet listed, buyers can contact the bank directly and make an offer, but that usually works only if it’s a small, community bank with a decision-maker readily available, Blomquist says.
Banks are reticent to flood the market – and a neighborhood – with foreclosures for sale because it can soften home prices and therefore take an even greater hit when it comes time to sell, he says. Some real estate firms, such as Island Advantage Realty in Hauppauge and Cruse Real Estate in Seaford specialize in foreclosures. It makes sense, Realtors say, to work with an agent who has experience with REO properties.
“If the agent is unfamiliar with the process, of course [buyers] are going to be intimidated because they don't know what's going to come around the bend," says Michael Kenduck, who owns Cruse Real Estate, which has roughly 175 foreclosure listings for sale.
2. GET FINANCING
Buyers should be preapproved for a mortgage, not just prequalified. That's good advice for any home buyer, but it is especially important in the foreclosure market, where good deals are snapped up quickly and regular buyers are competing with investors offering cash.
"The proper financing is essential to success," says Todd Yovino, who owns Island Advantage. "They can't expect a property to come to market and then get prepared at that point."
If a foreclosed home is in pretty good shape, the deal could work like a regular home purchase. However, when looking in the distressed market, buyers should take that word seriously. Foreclosed homes come in a variety of conditions. Some may simply need a new coat of paint or a new kitchen, while others may need the roof repaired and plumbing replaced.
"Sometimes, the plumbing is stolen," Fitzgerald says. "It's a little bit scary."
Banks are often reticent to lend money if a property is in bad shape — and it can be tough to determine how much work the property really needs before going into contract.
"That's one of the biggest obstacles," says Michael McHugh, president and chief executive of Continental Home Loans in Melville and president of the Empire State Mortgage Bankers Association. "It's also one of the reasons why a foreclosure without a lot of cash is not a good idea."
Traditional financing is probably not in the cards if the house is not in livable condition. "You may assume you can get a loan, but not every bank will," McHugh says.
Generally, the buyer is responsible for the cost of repairs. Kenduck says there can be exceptions. For example, it can be written into a contract that if termite damage is found, the bank will pony up the cost to fix it.
Financing can cover the cost of more extensive renovations. A Federal Housing Administration 203k loan will provide a loan for the cost of the house and repairs, which must be done by an FHA-approved contractor who is paid in stages as work is done. Rates for the combined loan are a little higher — currently about 4 percent for a 30-year fixed mortgage versus about 3.6 percent without the money for renovations, says Chris Gonzalez, executive vice president at Academy Mortgage Corp. in Bellmore.
Peter Oktas used a rehab loan to make improvements to the 1,600-square-foot, four-bedroom home in Plainview he purchased for $340,000 in March. With the $27,000 loan, he hired a contractor to fix the roof and replace the siding and windows on the foreclosure, which was put on the market last fall. Oktas paid about $40,000 out of pocket to fix the electrical and plumbing systems, since he was borrowing an amount he felt comfortable with and wanted an "easy closing."
"When I saw the offer accepted, I was kind of shocked because everyone was saying it was impossible to close a deal for a foreclosed property," says Oktas, 37, a first-time home buyer who is in the restaurant industry.
3. EXPECT DIFFICULTIES
In many cases, the process of buying a foreclosure can be grueling and filled with difficulties.
With a regular home purchase, the closing date can be flexible. Usually, foreclosures must close within 30 days after a contract is signed by both sides. "When you buy from a lender directly, you close before they say you have to close, or you could really lose your down payment," says Richard Klein, an attorney with Diamond Law Group, a real estate law firm in Mineola.
Banks also want to keep their overhead down, usually turning off utilities. However, the electricity, heat and water need to be on for the home's inspection and appraisal if the transaction is subject to financing, which is typically the case.
Buyers can put the utilities in their name before signing the contract if the lender refuses to do so, which is almost always the case; however, the purchasers must be comfortable with this arrangement, Klein says.
"If you like the home, you're willing to do everything in your power to make that happen," Klein says.
Marlena Schein, a broker with Coldwell Banker Manor Gate in Wantagh, says a certificate of occupancy for the home can sometimes be difficult to obtain. And as with all good deals, there can be a lot of competition. Schein says there are usually four to six offers on a property — and all-cash investors don't need a mortgage.
"I work with buyers who think they're going to buy an REO," Schein says. "Most of them don't. They come with stars in their eyes, thinking they're going to get a really good deal. Most of them, after they finish, they say, 'never again.' "
The sales can work out in a buyer's favor, even with all the issues. Klein often tells the story of a client, a regular home buyer, who made an offer on a foreclosed home that she loved. The bank said she needed to get the contract and down payment within five days, but she needed the contract to get the money from her 401(k), which would take 10 days.
The bank later put the house on the market for $10,000 less than what Klein's client had offered. She went back and made the lower offer, and the bank accepted.
"In a buyer's market, the buyers usually call the shots with when they want to close," Klein says. "If you have someone with that mentality, this kind of throws them for a loop. If you want to win and get the home, this is what you have to do."