REPORTED FROM HIS HOUSE — I did not set out to buy a foreclosed house.
Earlier this year, I wrote about selling my condominium unit in 2005 to rent, rejecting the hyped promise of an always-rising real estate market. Now I've purchased a foreclosed home -- but that doesn't mean I've bought into the new wave of hype in real estate, the idea that cheap, repossessed houses are a sure bet.
There's usually good reason many foreclosed houses languish with no buyers. They may be badly damaged or situated in places that seemed attractive only in the frenzy of a real estate bubble.
The foreclosure inventory is loaded with properties far from job centers, stripped or even vandalized by previous owners or in abandoned developments with no parks, schools or even neighbors nearby.
As a result, finding a decent house amid the wreckage of the real estate crash can be a long, tedious process. Then, actually buying one can also be tricky. When a foreclosed house in good shape and in a desirable location gets to market, it often attracts multiple offers, even in this struggling real estate market.
But a foreclosed house might still be an easier way to get what you want than trying to get stubborn individual sellers to lower their list prices. In both my day job covering the housing market and my own search for a house, I've seen what has worked for many buyers of foreclosed homes.
This is what worked for me.
Why a foreclosure?
Some purchasers think foreclosed houses and condominiums are so cheap that they can make money flipping them -- just like in the old days of the housing bubble.
But the reality is that people who buy now are still taking a big risk. The median home sale price in Southern California has fallen close to 40% from its peak, and chances are good, to say the least, that it will keep declining.
That was OK with me, though. I was not counting on price appreciation. After three years in our rented house, my family basically wanted to get a place we could decorate as we pleased, and one with at least some of the features we had been living without -- a two-car garage, air conditioning, a kitchen sink with a garbage disposal, maybe even a dishwasher.
When we began looking for a place early this year, though, the prices set by individuals on their homes seemed ridiculous in light of the market crash. And sellers wouldn't budge, even when they got no offers.
But there's hardly a more motivated home seller than a bank trying to unload a house it had to take over when its owner defaulted on the mortgage. So it seemed as if foreclosed properties might be the best if not the only choice for us. There were plenty of them out there: Half the homes sold in Southern California in September had been foreclosed, and they will probably make up the majority of homes sold in the region for at least the near future.
I began to check foreclosure listings online and signed up for a paid tracking service. RealtyTrac and ForeclosureRadar are among the choices. These services list houses in default -- ones on which owners have missed mortgage payments but that are yet to be repossessed -- as well as properties seized by lenders. They also indicate the dates the homes are to be auctioned.
For a house in the early stages of foreclosure, a potential buyer can send a letter or knock on the door of the homeowner in default and offer to buy the house directly. I tried this with one house we particularly liked, but the owner was too far underwater to sell the house at a price I could pay.
I continued to track the house, which we felt was the perfect size for our family. It was also just a few blocks from my daughter's best friend's house, and close to her school and my office. We called it "the red-door house" because of its crimson front door, and dreamed it might be ours. I soon learned from the websites that the house was headed for auction.
Buying a foreclosed house at a "courthouse steps" auction requires a good amount of knowledge -- and cash. State law requires that foreclosed properties be offered at a public auction, to give buyers a level playing field. Opening bids are typically the amount owed on the house plus an additional sum to cover processing fees.
In today's depressed market, that amount is often more than the house could be sold for on the open market. Consequently, many houses receive no bids at auction, and the lender ends up putting the house on the market through a real estate broker.
If a house is up for auction with an opening bid far below its current market value, it's likely to be snatched up by professionals who regularly attend the auctions, armed with stacks of cashier's checks to pay the full amount. Houses must also generally be taken as is, with no inspection.
For those reasons, I didn't bother going to any courthouse auctions. It would be easiest, I figured, to simply wait for the houses to be listed for sale through brokers.