Great Homes at Deep Discounts

Home prices may not have hit bottom quite yet, but they are finally low enough to draw bargain hunters. The national median home price has fallen 26% since its peak in early 2006, according to Fiserv Lending Solutions, a home-price research firm. Sales are especially brisk where prices have dropped sharply and foreclosures are rampant-in California, Nevada, Arizona and Florida-partly because foreclosures put pressure on traditional sellers to cut their prices, too.

Nationwide, nearly half of all sales in the fourth quarter of 2008 were "distressed"-mainly foreclosures, but also sales by homeowners selling for less than they owe on their mortgage-according to the National Association of Realtors (NAR). Foreclosures will continue to rise with the jobless rate and the next wave of subprime-mortgage delinquencies, despite relief efforts by lenders and the Obama administration. And most experts don't expect home prices to start recovering until 2010; in fact, Fiserve forecasts that the median price will fall by another 14% in 2009. That, plus the dour economy, will keep many buyers at bay.

Still, it's a good time to snag a bargain if you're confident in your job prospects and you don't plan to sell for at least five years. The NAR says homes haven't been this affordable since the 1970s: Interest rates on 30-year fixed-rate mortgages are hovering near 5%, and with so many homes for sale, you can be as picky as you like. If you're a first-time buyer and you close on a home before the end of November, you'll be eligible for an $8,000 tax credit, too.

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Buying from the bank

Foreclosure begins with a homeowner's failure to make a mortgage payment and ends on the courthouse steps, when the home is auctioned off to the highest bidder. If bidders fail to meet the bank's minimum (usually the balance of the mortgage), the bank will buy back the home and sell it as a real estate owned property, or REO.

For most home buyers, REOs provide a less risky route to a bargain than homes sold earlier in the foreclosure process, which are strictly "buyer beware" properties that attract seasoned investors prepared to tackle major rehabbing. Even they get burned sometimes by legal encumbrances and liens that transfer with the property to the buyer.

With an REO you get a clean title, and you don't have to deal with a harried homeowner, a difficult-to-evict tenant or, in some states, a mandatory redemption period during which the previous owner can try to get the home back. You'll still get a deal; how good it is depends on the market. The city with the largest discount compared with median price on REOs is the Las Vegas suburb Henderson, Nev., at 33%, according to a survey by Trulia.com, a real estate Web site, and RealtyTrac.com, an online foreclosure marketplace.

Dan Wittman, 39, and Melissa Swearingen, 35, got a great deal on an REO in Phoenix, where inventory, fueled by foreclosures, is high and prices fell by 34% last year. They had to relocate from Denver for Dan's job, and fortunately, they had no trouble selling their home because Denver's housing market is one of the healthiest in the nation. The couple's Denver home, in a golf-course community, sold quickly for just $1,500 less than its list price of $290,000.

In Phoenix, they looked at more than 30 homes with Ken Reid, an exclusive buyer's agent. Reid says that these days it's not unusual for buyers to look at as many as 40 to 70 homes. Wittman and Swearingen spotted a 3,000-square-foot, five-bedroom REO that had been on the market for six months and was listed for $240,000. When it was new, in 2005, it sold for $429,000. The couple acted fast to beat the competition and offered full price plus $700-as well as a 20% down payment-to sweeten their bid. The home was appraised at $275,000.

Although you can have REOs inspected before you sign a purchase contract, they are sold "as is," so you can't negotiate the price based on the home's condition. The inspection merely gives you an out. Disgruntled homeowners who lost their property may have stripped the home of major appliances or even trashed it. While the home is vacant, it may be vandalized or inhabited by squatters or small animals. Turned-off utilities may lead to broken pipes and water damage, mold, mildew and smelly carpets. Swearingen and Wittman spent about $9,000 to replace missing appliances, numerous light fixtures and the upstairs carpet. But their home's total price was so good they could afford to add a swimming pool.

Researching REOs

Visit the Web site of your local multiple-listing service (or ask your real estate agent) and look for listings labeled "REO" or "bank owned." RealtyTrac.com and Foreclosure.com offer listings of homes in foreclosure (both are available by subscription with a one-week free trial). You can see each property's loan history, which often reveals what the previous owner paid for it at the top of the market. For Fannie Mae's REOs, visit HomePath.com; for Freddie Mac's, go to HomeSteps.com.

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Don't offer list price without first researching selling prices of comparable properties in the area. A bank will hire an agent to generate a "broker price opinion," which may have been hastily researched or may simply be outdated. Your agent should come up with a comparative market analysis that reflects local reality.

You can make your offer contingent on an inspection, title search, financing, appraisal and sale of your current home. However, if the bank receives multiple offers, the one with the fewest contingencies will rise to the top. The bank may require you to get its own preapproval for financing and submit it with your offer. You can apply for a traditional mortgage elsewhere, but first check with the REO's bank, which may offer a below-market interest rate or a low down payment.

Banks may respond quickly to an offer-or not, says Elizabeth Weintraub, an agent in Sacramento, Cal. REO agents swamped with listings by bank clients may not even pick up the phone. You can try a including a contingency in your offer that imposes a deadline for an answer.

Short sales take patience

In a short sale, a home is sold for less than the outstanding mortgage balance with the approval of the lender. Prices are often attractive, but short sales aren't for buyers who face a deadline or are easily discouraged. Lenders take an average of eight weeks just to respond to an offer (compared with 12 days for an REO), according to a survey of agents by Campbell Communications.

A short sale may be advertised as such-or it may not be, in hopes that you fall in love with a home before you learn its status. The bank may announce a minimum price, hold out for multiple offers and then ask everyone to do better. And approval of a purchase is complicated. The bank may only be servicing the loan, and the investors who actually own it will have to weigh in, as will any second-mortgage lenders. And banks may have too few staffers to handle the hundreds of short-sale offers they receive. Buyers need to find a willing buyer's agent who knows which local listing agents are experienced and successful short-sale closers. The best ones know how to overcome the banks' inertia.

Once the bank signs off on the agreement that you and the home seller have reached, you can get an inspection, but it will be too late to renegotiate the price. So it's a good idea to build the estimated cost of repairs into your offer, says Dawn Rae, an agent who handles short sales in Tampa. You can base that on a walk-through with your agent or pay $300 to $500 for a professional inspection early on (but if your offer is rejected, that will be money down the drain). As with REOs, you can add contingencies and seek traditional financing, but you should get your preapproval from the seller's lender to make your offer more attractive.

Deals, not steals

Michael Evans, 39, and his wife, Anu Gupta, 37, recently moved to the Washington, D.C., area. In their search to buy a home, they shopped online for foreclosures, but they couldn't find one in a neighborhood they liked. They eventually found what they were looking for -- a kid-friendly neighborhood near public transportation -- in Takoma Park, Md., a close-in suburb of D.C.

They bid twice on a 1,600-square-foot, two-bedroom colonial on a large lot. Their first offer of $565,000 lost to a full-price competing offer of $639,000. A month later, the couple realized the home was still for sale (the other buyers' financing had fallen through), and they again offered $565,000. After back-and-forth negotiations, they ended up paying $580,000, but the sellers threw in a few thousand dollars to cover needed repairs.

Foreclosures come with their own set of headaches, and they're often clustered in new developments built far from city centers. Evans and Gupta's agent, John Sullivan, notes that buying in a stable neighborhood may be the better deal in the long run. Even if prices continue to drop, they are likely to recover more quickly there than in a development full of foreclosures. Plus, the condition of the home may be better to begin with, and if not, you can negotiate on price to account for it.

Your agent will help you decide how much to offer. But as a starting point, check recent comparable sales and calculate the average reduction from the asking price they actually sold for. Subtract that figure from your seller's list price to come up with a reasonable offer. If prices continue to decline, the home fails to appraise for the agreed-upon amount, and you really want the home, you could try adding some cash to the deal as a good-faith gesture. Otherwise, keep looking. Another deal may be right around the corner.