Home & Garden
Real Estate Owned properties (REOs), which are essentially bank owned properties, are all the rage right now and rage may be the operative word once you’ve taken possession. So take your time, pry open those cavalier jaws and say “Ahhhhh.”
There are a lot of repossessions or REOs (what happens to a foreclosure when it doesn’t sell at auction) on the market these days and I think we can all expect a lot more of them on the market as the financial crisis worsens and roosts with the lower classes (which may include thee and me) that are losing their jobs all around us.
While the fledgling Obama administration valiantly attempts to slay the dragon of unemployment (were there actually 600,000 jobs lost in January?) or pray for rain of the mortgage lenders in the U.S., it is clear that in the best of circumstances, there will be hundreds of thousands of homes that are given up to foreclosure or sold off for less than their mortgages (tragically referred to as being under water. I think I’ll name my foreclosure company, Poseidon Real Estate).
These homes have two features that buyers should be aware of as they sniff around this sort of investment. First is that they tend to be in bad shape. I’ll say a lot more about that. The second is that they tend to come with little to no disclosure of former known problems. Let’s start with this issue.
Let’s say that the furnace has failed just days before foreclosure and there is a report issued by an HVAC (that’s heating, ventilation and air conditioning) contractor explaining what needs to be done and the cost. This piece of information would not have to be provided to the person the bank is selling to (let’s say … you). The same can apply to engineers’ reports, roofing reports and a range of other data that might display important and financially salient information. There is no requirement for banks to provide any of this information to you once it is in their ownership.
This might be a good time to write to your Governator (or your state senator. Local Berkeleyites can contact our dear Loni Hancock) and ask that the disclosure laws be extended to subsume the banks so that they are held culpable (just as you would be) for failing to disclose known defects or other issues that can have a material impact on subsequent ownership. These can include known disputes with neighbors regarding fences, failed attempts at obtaining permits for expansion or the presence of fuel tanks on the property. The range of what disclosures can tell us is very wide and their requirement is, a fundamental consumer protection that took years to secure. There is no reason that paperwork should be thrown out just because the bank took possession. Don’t ask don’t tell isn’t a good policy in the military or at the bank.
Now for that other issue; overall condition. It’s been quite a year looking at REOs, short-sales (those deep sea diving expeditions I mentioned earlier) and foreclosures. The one thing that these properties nearly all have in common is that they are in bad shape.
Many had leaked internally and had damaged flooring, drywall, mildew and mold. Many needed paint. Many had kitchens and baths that belonged in the ICU and most had a lot of bad workmanship that was going to need to be redone. That last one is what I’d like to focus on for a while.
When people run out of money or have to get by on very little, they tend to hire inadequately skilled persons to make repairs for them (and sometimes the inadequately skilled person is the owner themselves). Nobody can blame folks for negotiating their hardship in this manner. It’s life. But the end result is pretty sad and when you’re looking at buying a house that has been owned or inhabited by residents forced to make, perhaps, years of these sorts of decisions, you may be looking at a LOT of bad work that will have to be redone.
I spend an hour or so with my friend Chuck a couple of weeks ago at a house that he and he new wife were looking to adopt. Chuck is a pretty smart fellow and knows more than a little about wiring, plumbing and the rest of that stuff but, between the sticker-lust (many of these properties have been hitting the market at very low prices of late), the speed of the process and the fact that many important features take some time to expose, he had not seen a lot of important elements that ultimately changed his demeanor from excitement to malaise in this short session.
Now, let’s be clear. These houses can be great deals if you do the math and understand what is and what is not expensive, important, dangerous, etc. However, it is important to do the math. To open Old Paint’s jaws and take a good look at her teeth. It may take hours of looking closely, making financial estimates and planning a year or two of upgrades to decide that the bargain is, in fact, a bargain. Many will be and many will not.
Lastly, let’s just look at you and the process. Are you a project person? Is this a house you will need to move into right away? That can be a very important question if this is a house that needs major work. It may be that the house will need several months of major rehab and that inhabitation won’t be much fun for any but the person who’s been living in their car.
If you haven’t done major remodeling, you may not be accustomed to working with contractors. This is whole discussion unto itself but consider it sufficient to say that the cost of making improvements is not equivalent to the difference in value between two houses. A house that is already in good stead and suited to your needs is always a better deal than the one that is not, even if the cost is lower by the amount of the projected repairs. This is because you have to endure the work and because there is a failure factor to work into the equation. All remodeling work does not go well. Some lead to disputes and some come out poorly. Costs nearly always exceed expectations and so do time estimates.
This is not to say that remodeling and repair cannot be a great experience but as many can attest, it’s complex and sometimes disappointing. So, remember to factor that in.
REOs are going to make money for some people in the coming years. Some will also get a chance to own homes through this sweet and sour process (let’s not forget those who will be, or have been, tossed out and not so few by having been offered mortgages that they, predictably, could not service).
My wish for you is that you will take a very close look at the house (perhaps, ahem, with some professional help), at all the financial aspects and feel that you are prepared to walk up to that gift-horse, smile and invite her to say “Ah.”