On the House: Foreclosure sales call for caution

Posted: February 10, 2013

A colleague was glued to her computer screen during a recent lunch hour, scrolling real estate websites. To be exact, foreclosure websites.

Though foreclosure search engine RealtyTrac has determined that the numbers have been declining since 2010, distressed housing seems in evidence in many of the places I visit each week to write "Town by Town" for the Sunday Business section.

There are enough short sales - in which a lender agrees to accept less than is owed on the mortgage - that they are mentioned in my conversations with real estate agents.

The government, along with lenders' growing willingness to limit losses by avoiding foreclosure expenses, has pushed short sales to the forefront, although the jury remains out on whether that process moves more quickly now than it has previously.

Anyway, I cautioned my colleague against buying a foreclosure, an endeavor still best left to the pros, especially experienced investors.

Donald Sepety of Prudential Fox & Roach in Collegeville, who specializes in foreclosures, maintains that his biggest job is getting prospective buyers to understand that they'll be acquiring the property as is.

The lender is going to do nothing to bring a foreclosed house up to code, for example; the buyer has 60 to 90 days to have the necessary work done to get a certificate of occupancy before moving in. So an inspection before purchase is critical, allowing the buyer to negotiate with the lender to lower the price, according to Sepety and other experts.

"Buying a house for $30,000 below market value doesn't mean much if you have $40,000 in necessary repairs," says Todd Hills, CEO of pawn-store website Pawngo.com.

Use the home inspection to calculate how much the repairs will cost and to be certain you can pay for them, especially repairs that can't wait, Hills says.

Avoid buying more house than you can afford by preparing ahead of time, he adds. Determine the maximum you will pay for the property before you go to an auction. Also check how much of a down payment you should have on hand, typically 5 percent to 10 percent of the asking price.

Hills suggests dealing with Fannie Mae and Freddie Mac, which have a large inventory of foreclosed homes.

"They also have the capability to offer a variety of money-saving benefits, including down payments as low as 3 percent, no mortgage insurance even though the down is less than 20 percent, no required appraisal, and you can have a credit score as low as 580," he says.

There are loans that provide money for renovating these homes. For example, a Federal Housing Administration 203(k) loan lets you build repair costs into the mortgage of an owner-occupied property.

If you're planning to make a killing by buying and flipping foreclosures, though, think twice.

"Due to the large pool of foreclosures today, reselling is a lot tougher," Hills says.

"If you don't plan to live in the home, make sure that the property can be rented while you attempt to resell it."

On the House: Town by Town

In the Sunday Business section, Alan J. Heavens takes a look at real estate and life throughout the Philadelphia region. This week's focus: Passyunk Square

Contact Alan J. Heavens at 215-854-2472, aheavens@phillynews.com or @alheavens on Twitter.

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