Buying Foreclusres? Do your homework

 

Problems with the property condition can eat up profits

 

HONOLULU ADVERTISER   June 10, 2007

 

BY LISA SCONTRAS

 

Custom Publishing Group

 

With reports of foreclosure rates rising around the country, is this a good time to start shopping for bargains?

 

 

For the mainstream buyer on Oahu, buying a foreclosure is not as easy as it sounds. Here’s why.

 

On most of the Mainland, foreclosures are rising because many subprime borrowers are reaching the end of the locked-rate term on their loan. When their interest rate adjusts and their mortgage payment increases — sometimes dramatically exceeding their ability to pay — they often become delinquent. Faltering sales prices in some areas may mean they now owe more on the property than it’s worth. They can’t sell the home to pay off the mortgage and with no other options, they default.

 

On the Mainland foreclosure rates are setting records mainly due to that scenario. Homeowners here are not suffering the same fate.

 

“Hawaii is really very different from the rest of the country,” says Bill Chee, CEO at Prudential Locations LLC. “We’re ranked 42 of 50 in the country ... for having one of the lowest foreclosure rates in the nation.”

 

The strong market enables in-over-their-head homeowners here to usually put the property on the market and sell it before the bank forecloses on them. Fewer properties actually make it to the auction block.

 

“It’s a nominal opportunity here,” says Chee. “The foreclosure supply is very limited. As a result, the vast majority of foreclosed property is bid up to market value — occasionally higher. Good deals are hard to come by at foreclosure auctions.”

 

That doesn’t mean some aren’t successful buying foreclosures. If you still want to give it a try, it is recommended that you do so with your eyes wide open, do your homework and understand the intricacies of the foreclosure process.

 

First, know that it is very difficult to get information about properties in foreclosure.

 

“There are no open houses, no available photographs, and very limited information about the condition of the property,” warns Chee. “Obtaining information from the current property owners is unlikely as homeowners faced with foreclosure are generally uncooperative and often hostile.”

 

There are several risks associated with buying a foreclosure. Property condition is generally unknown — often dilapidated. It may be difficult to get in to see the property. Additionally, because the owner is overwhelmed financially, the property may be encumbered with a second mortgage or other liens. Remember, when you’re crunching numbers, to find out if the owner has taken out equity or has any other liens on the property. This along with unforeseen maintenance items could significantly eat up your perceived profits if you’re not careful.

 

“You buy the property ‘as is’ without any warranties,” explains Chee. “You need to decide if you can deal with that risk.”

 

If you are successful at buying a property that has been foreclosed, the next problem has to do with occupancy.

 

“As the new owner of a foreclosed property, it is your responsibility to evict the previous owners,” adds Chee. “Often this involves throwing a financially distressed family out on the streets. The eviction process can take up to six months and you will have to make your mortgage payments while you evict the previous owners.”

 

If the most alluring of all real estate purchases still intrigues you, proceed with caution.

 

“There are some good buying opportunities,” says David Lereah, the National Association of Realtors chief economist. “But don't repeat the mistakes of the foreclosed borrowers.”

 

Until recently, a large percentage of buyers saw little risk in rushing into an adjustable-rate mortgage or an exotic loan with a low or no down payment. Now, many are suffering the consequences of soaring payments they can't afford.

 

So before you try to buy a home in foreclosure, be sure you have a good credit score, enough cash for a sizable down payment and a lot of patience.

 

 

 

 

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