Three Post-Bubble Homebuyer Strategies

• By Carol Kopp
• On 1:10 pm EDT, Friday October 2, 2009

If we've learned anything from the bursting of the great real estate bubble, it's this: Nothing can cure an American of the desire to own a home, especially if it looks like a bargain.

As Minyanville reported on September 10, seized properties now account for almost one in four home sales nationwide.

In other words, the heartaches of other owners haven't deterred anyone from jumping into the market. They've provided opportunities for those who got shut out of the market by stratospheric prices.

So, how are people getting in on the deals?

There are at least three unconventional strategies for buying a home right now. None are for the faint of heart. But you can dip your toe in before committing yourself.

Here are some facts to get you started.

1. Buying A House In Pre-Foreclosure

When a house is "in pre-foreclosure," its owner is caught between a rock and a hard place.

The owner has fallen behind on the mortgage payments. The lender has warned that it will foreclose unless payment is made. The official grace period -- about three months -- has begun.

This is your opportunity to step in and make an offer for the house. But you'll need the hide of a rhinoceros and the patience of a saint before you're done.

Most homeowners in this situation aren't exactly shouting about it from the rooftop. But real estate agents eat gossip for breakfast, and may know of an opportunity. Aggressive speculators are papering troubled neighborhoods with their contact information, hoping to score a deal sooner or later. Occasionally, the homeowner will list the property in hopes of getting out gracefully.

Assuming you locate a house that interests you, you need to do your homework, mostly in the county recorder's office, to determine how much is owed on the house, in mortgages and other debts like taxes.

If your research pans out, your offering price will be somewhere between the amount owed by the current homeowner and the market value of the house.

You can try offering less than the amount owed the bank, in hopes that the bank is willing to cut its losses. The term "short sale" is being tossed around pretty blithely these days, but it sometimes works.

Once you set an offer price, you need to contact the owner, who may be in no mood for a chat. Assuming you get a foot in the door, you may be able to come up with a price acceptable to both of you.

If so, the next step is to contact the bank, which will have a "loss mitigation department," or at least a contact name attached to this troubled loan.

You send in your offer, sit back, and wait. Based on discussion threads around the Internet, you could wait for a year or more for a response. It makes no sense, but there it is.

2. Buying A House Directly From A Bank

For the prospective home buyer, this is a whole lot less work and risk.

But beware of the neo-bubbly fringes of this market. You've probably already seen ads offering staggering profits in the "REO" market.

REO means real estate owned by a lender. And you don't need to pay to access someone's database of one million listings to get in.

Some big lenders who are stuck with a lot of houses are operating sites devoted to their real estate listings.

The site for Countrywide, now owned by Bank of America (BAC), lists available properties, with the address, list price and contact information.

Fannie Mae (FNM) offers the pretty slick HomePath.com with lots of pictures inside and out, and data such as the home's last sales price, and which school district it's in.

JPMorgan Chase (JPM) has an REO site with listings and minimal information, and refers prospective buyers to brokers, as does the REO site operated by Citibank (C).

These and other foreclosed homes are routinely being listed with Realtors, so they should pop up in an MLS search (that is, the multiple-listing service shared by brokers).

Theoretically, there should be good bargains in there. These are bank-owned properties, and the bank wants to make a deal.

Browsing the listings is a learning experience. Here are a couple of results from sample searches from HomePath.com:

A search in the Philadelphia suburbs turns up a historic house in Radnor, a Main Line town, for $399,500. The last sales price was $410,350, in 2007.

Call that a bargain? I don't think so.

Results in hard-hit Miami include a nice four-bedroom house that once sold for $460,000, now under contract for $189,900; and a townhouse that previously sold for $255,800, now available for $157,900.

That's more like it!

Or is it?

Just like in any real estate deal, you need to do your research to determine if you're getting a great price, or even a fair deal, for that house in that neighborhood of that city in 2009.

3. Buying at a Foreclosure Auction

Would you buy a house sight unseen?

Knowing that the previous owners may have trashed the place out of pure fury before getting evicted? And that roving gangs of looters may have ripped out the plumbing to sell to a scrap dealer? Or, alternately, that the former owners, or their tenants, or squatters, may be still in residence when you show up to claim ownership?

If your answer is "yes," then a real estate auction may be for you.

These, of course, are worst-case scenarios. Now that foreclosure auctions are common, they're getting a bit more user-friendly, with nice touches like open houses before the auction date.

But as you learn more about the foreclosure auction process, you may decide to leave it to the professionals and speculators, who presumably have deep pockets and insiders' knowledge (at least stretching as far as having seen the inside of the house). Please see, A New Dictionary of Realtor-Speak.

If you have your eye on a property that you know will be auctioned, here's what you need to do in advance:

A) Find out how much is owed on the house, in mortgages, back taxes and other debts. A real estate lawyer can help with this.

B) Determine what a comparable house is worth. A Realtor can help with these "comps."

C) Arrange pre-approval of financing. If your bid wins, full payment is due in less than 30 days -- sometimes much less.

D) Get a cashier's check for about 10% of the amount you expect to bid on the house. And it's not refundable if you win but then back out.

You can get an idea of what to expect by taking a look at one of the many foreclosed property auction houses now represented online. Some even have live streaming video, and take online bids.

But don't get excited when you see a house that previously sold for $415,000 with an opening bid of $1,000. There will be a secret reserve price, or a large lien, or both, and it may well total $415,000, or close enough.

4. And One More Home-Buying Option

One sensible piece of advice on the current housing market came from, of all people, a New York City real estate agent.

If you're anxious to buy a home, she said, your best bet is to just sit tight for a while. Watch and see how the auctions, and the pre-foreclosure sales, and the REO sales, fall out. See also, Will Improvement in Housing Index Last?

In effect, these extraordinary sales are re-setting the comparable prices for homes, neighborhood by neighborhood across the US.

When we know where we are price-wise, it will be time to go house-hunting.

Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.

Buzz up!