If you're in the market for a home in today's market, chances are you're going to come across distressed properties.
Nearly one-half of homes and condos listed for sale along the Wasatch Front this spring are either bank-owned those repossessed in foreclosure or short sales, in which a bank agrees to accept less than it is owed by a home seller.
Many distressed houses sell for at least 5 percent to 10 percent below today's market value and as much as 50 percent or more off peak selling prices of five to six years ago. Combine low prices with low mortgage rates and it's easy to see why interest in buying short sales and foreclosures is so high.
"Some of the prices are so low that I can't pass them up," said Aaron Marshall, associate broker with Keller Williams-Salt Lake, who in recent months has purchased a number of these properties as rentals.
On a recent tour of distressed single-family homes and condos along the Wasatch Front, however, Realtor Marshall demonstrated that getting a great deal isn't a certainty, and that buyers must have patience and beware of some common buying pitfalls.
Rhiannon Lawrence and husband Jeff Zitting didn't realize just how much patience they would need while trying to buy a home in the Salt Lake area. The couple hasn't specifically been trying to buy a short sale or bank-owned property but can't seem to avoid them in their search for a home near downtown. They have made offers on several homes in short-sale situations but many of their overtures have gone unanswered.
"With a short sale, you have no idea if you'll even get a response," Lawrence said.
Weeks ago, the couple made an offer on a home in the Avenues near downtown. Although the home is nearly exactly what they are looking for, they are trying not to get their hopes up that the sale will work out.
"It's a beautiful home, but who knows if we'll even hear back about our offer," she said. "It's frustrating."
Banks are in the business of making loans, not selling real estate. And more than five years after the housing downturn began, many still aren't particularly good at the selling part, which can lead to weeks and months of delays for frustrated buyers. Most financial institutions remain overwhelmed with the sheer number of problem loans on their books and the properties of which they must dispose.
Even if buyers can endure the wait, how good of a deal they can get depends on a lot of factors, such as the flow of distressed listings, which often come on the market in waves as banks work their way through problem loans. Getting a bargain also can vary based on individual lenders, who employ differing strategies to get homes sold.
Some banks are better than others in dealing with problem loans. One might put homes on the market priced to sell, while another might pad prices a bit so there's room to make concessions down the line.
So how do you get a good deal on a distressed property? For starters, resist the temptation to be reeled in only by a low price or by how much less it costs compared with the last time it sold, say Marshall and other real estate agents.
If you're in the market for a condo, check out the homeowner's association to make sure it has adequate reserves and is certified by the U.S. Federal Housing Administration. Without that seal of approval, buyers with FHA-insured loans and some with other types of loans aren't able to purchase units, which could affect your resale value.
As with any home purchase, price is only part of the picture. One of Marshall's listings, for example, was a bank-owned condominium in West Jordan that the lender elected to list for sale at $127,000. That's nearly half off what the condo would have sold for at the market peak in 2006, and it was in great move-in condition, too.
But the homeowner's association dues were high in relation to similar condos for sale in other projects, Marshall said, and the unit was a bit small. With that in mind, he thought the asking price was too high.
"I can provide my opinion on the selling price, but in the end, the bank tells me what to list a property for," he said.
The bank eventually lowered the price to $124,000 and then to $119,900. After the second adjustment, it sold.
In any realty transaction, it's important to pay attention to the details, but even more so with a distressed property, said Greg Call of Prudential Utah Real Estate.
"Many times, the price reflects the condition of the property," Call said. "It may be a great buy on paper, but when you look at the property, it might not be that great of a value."
It also pays to decide early on how quickly you want to buy and how much hassle you're willing to go through. Buyers going the short sale route but who face a bank that has yet to approve a selling price can face delays of months, even more than a year, to close the deal. Once the bank approves an asking price, the property may sell much more quickly, within weeks or a few months.
But even with an approved price, a short sale can take twice as long to close as a sale in which a bank isn't involved.
Seller Brett Loertscher knows it may take some time for the bank to approve the terms of a sale, even after he finds a buyer. He and his wife purchased a home in Kearns at the height of the market in 2007 for $175,000. Last year, they wanted to refinance into a lower-rate loan but quickly discovered that no bank was willing to let them because they owed more than their home was worth.
Loertscher has it listed for $124,900. He owes $165,000, so his lender is going to have to agree to take a loss on the loan. The bank also will call the shots on pricing and field offers from prospective buyers.
So far, there's been only one, for about $90,000, which the bank didn't accept.
Short sales involving only one loan often close faster. But in many cases, there can be multiple loans to contend with, which increases the complexity of a deal.
Call says it's not uncommon to have a home being sold via a short sale that has a first and second mortgage even a third. "There was a time four years ago when banks would lend money to you if you were breathing," he said. "A lot of lenders went nuts."
When a seller has a first mortgage and one or more home equity loans or lines of credit, all lenders with an interest in the property must agree to a short sale.
Once a home has been foreclosed, gone through the auction process and put back on the market as a bank-owned property, all the loans have been wiped out, and a property can be sold with a lot less hassle.
But not always.
On his tour of broken dreams, Marshall drives by a home in South Jordan that is a foreclosure, but it has a different issue. The city slapped a lien on a group of properties, including this one, owned by the same bank due to a a number of violations, including unpaid utility bills, tall weeds and trash. Until the bank settles the lien and pays a penalty Marshall says it could be as high as $20,000 to $30,000 this bank-owned home in unsellable.
Just like a home's entanglements, the physical condition of distressed properties on the market varies widely. In West Jordan, Marshall points out a bank-owned, 2,500-square-foot home listed for $196,000 that sold after only 18 days. At the height of the market, it sold for $305,000 in January 2008. It's in good condition with a new air conditioner. The last one was stolen.
Down the street, there's a significantly larger 3,800-square-foot, bank-owned property with a three-car garage, five bedrooms and three bathrooms that's, well, trashed. It was listed at $188,000. It sold for $199,500 after 14 days. Multiple bidders brought up the price of that property.
Which was the better buy? It all depends. The second home is a lot larger but in a lot worse condition. "If you can do a lot of work yourself, buying a home that needs work can be worth it," Marshall said.
But buyers also can end up having to invest so much in improvements they would have been better off buying a more expensive property in better condition.
Although some distressed properties are in pristine condition, others are a wreck, and some have even been stripped by the former owners of anything that isn't nailed down from light fixtures to appliances. Others have been vandalized by the former occupants, angry at losing their homes. Some have been victimized by vandals after they were vacated.
As with anything, it pays to shop around. That way, you know if you're getting a good deal.
Back in Salt Lake City, Rhiannon Lawrence and her husband are still looking for a home. At least half of the homes that the couple have been interested in are distressed in some way. She chuckles when she thinks about the couple's initial expectations. They figured that good credit, steady employment and the financial means to buy a home would mean a quick and simple home search and purchase. A year later, they are still at it.
"It's astonishing, when you think about just how many of these properties are out there," she said. "It makes everything a lot more complicated. It may be a buyer's market, but it sure doesn't feel like it."
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Utah's foreclosure crisis is showing positive signs, but the housing market still is littered with distressed properties. âº A1